IFS: Introduction of National Living Wage followed by strong pay growth for low-paid workers but little change in their average living standards

The introduction of the National Living Wage (NLW) in April 2016 meant a sharp increase in the minimum wage for employees aged 25+ from £6.70 to £7.20. 

• This was followed by strong pay growth for the lowest-paid fifth of employees of 6% between 2015‒16 and 2016‒17 (after adjusting for inflation). But there was little change in their average living standards as measured by their net household incomes, which only grew by 0.4%. 
• The modest 0.4% average growth masks differences between low-paid employees. 38% of the lowest-paid fifth of employees have above-average household income (because many have a higher-earning partner). These employees saw small falls in their household incomes (of 2%), due to falls in the average earnings of their higher-earning partners. By contrast, low-wage employees in low income households enjoyed modest (2%) growth in their living standards. This led to a 2 percentage point fall in absolute income poverty among low-paid employees in 2016–17.

These are the key findings of a pre-released chapter of IFS’ flagship annual report on living standards, inequality and poverty, funded by the Joseph Rowntree Foundation. The full report will be published on 20th June. 

The new research finds:

• Growth in hourly pay since the introduction of the NLW has been far faster for the very lowest-paid workers. Between April 2015 and April 2017 hourly wages grew by 10% after accounting for inflation at the 5th percentile and 7% at the 10th percentile in comparison to 2% at the 50th percentile (the median). Hours of paid work changed little, so the story is similar when looking at weekly earnings as when looking at hourly wages. 
• Large increases in pre-tax pay of low-wage employees didn’t translate into large improvements in their average living standards. Despite large increases in pre-tax pay the household incomes of low-wage employees (the lowest-paid fifth of employees) grew by only 0.4% in 2016–17.  This is partly because higher earnings led to higher tax payments and reduced benefit entitlements. It is also because the earnings of low-paid employees are, on average, only a small fraction (32%) of their total household income. In addition, the pay of high-earning partners fell in 2016‒17 suppressing average living standards.
• However, low-paid employees in households with below-average incomes saw their incomes rise by 2% in 2016–17 reducing income poverty. Absolute income poverty among the lowest-paid fifth of employees fell by 2 percentage points (from 24% to 22%) between 2015‒16 and 2016‒17, whereas it increased slightly for higher-paid employees. 
• Only 22% of low-wage employees in 2016‒17 lived in the lowest-income fifth of households. However, this is up from 17% in 2007–08, largely due to large increases in employment. This means that the minimum wage is better targeted at the lowest-income households than it was before the recession, since more of the lowest-income population are in work (but on low pay) than before.

Agnes Norris Keiller, a Research Economist at the IFS and an author of the research, said:

“The wages of low-paid employees have grown strongly since the introduction of the National Living Wage but improvements in their average living standards have been much more modest. In part this is because the pay of higher-earning partners fell in 2016‒17. However, low-wage employees who live in households with below-average income did tend to see growth in their living standards, reflected in falls in poverty.”

Notes to editors: