Economic impacts of the National Living Wage: in brief

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A new ‘National Living Wage’ (NLW) was announced by the Chancellor of the Exchequer at the 2015 Summer Budget. It means a substantial increase in the National Minimum Wage (NMW) for workers aged 25 and over, which was set at £6.70 per hour in October 2015. It will be introduced at an initial rate of £7.20 per hour from April 2016 and it effectively takes the place of the NMW for workers aged 25 and over.

The Government intends for the NLW to reach 60% of median earnings by 2020. It has asked the Low Pay Commission (LPC), which currently recommends the level of the NMW, to set out how this may be achieved. The Office for Budget Responsibility (OBR) estimates this would mean the NLW will be around £9 per hour in 2020, based on its forecasts for average earnings.

The LPC considers that the biggest winners are low-paid workers, with around 1.8 million workers expected to be paid at the £7.20 introductory rate in April 2016. However, there are uncertainties regarding the wider impacts of the NLW, and there may be some negative impact on employment and hours worked. The OBR has suggested the NLW could increase unemployment levels in 2020 by somewhere in the range of 20,000 to 120,000 people.

The NLW means several years of substantial increases in the minimum wage for older workers. Previous large increases in the NMW rate were from a considerably lower base, meaning there is little evidence about the effect of minimum wage increases on this kind of scale. The impact on employment, profits and productivity will largely depend on how employers choose to respond to the higher staff costs resulting from the change, as discussed in this note.