Has the National Living Wage reduced inequality?

“Across the economy, the fastest pay rises have been for people at the bottom end because we’ve brought in the National Living Wage, and that’s one of the reasons why income inequality has reduced in recent years, not gone up.”

David Gauke, 14 September 2017

It’s correct that lower-wage workers have generally seen the fastest wage rises in the last few years. The government’s introduction of the National Living Wage is part of the reason why, but there’s a lot more to inequality trends than changes in earnings alone.

Income inequality has fallen on some measures in recent years, although these trends are expected to reverse.

The National Living Wage has boosted earnings for some

The National Living Wage is the legally binding hourly rate for workers aged 25 and over. It came into force in 2016 and is currently set at £7.50 an hour. It’s different from the National Minimum Wage, which is lower and applies at different rates to people aged under 25.

This has contributed towards higher weekly earnings for people on lower incomes. Between 2013 and 2016, people on lower incomes saw much stronger earnings growth than people at the top, thanks to rises in the Minimum Wage and the introduction of the National Living Wage, according to the Office for Budget Responsibility.

Similarly, people on the Minimum and National Living Wage have seen stronger earnings growth after inflation than those with the middle and highest earnings earnings since about 2007. That’s according to the Institute for Fiscal Studies (IFS).

But this alone isn’t a magic bullet for reducing inequality

Mr Gauke goes on to connect the pay rises to reduced inequality, but there are two reasons we need to be cautious about this.

Firstly, the National Living Wage doesn’t benefit people at the very bottom as much as those in the middle. That’s because people at the lower end of the scale have more of their income made up by benefits. “The households gaining from the new [National Living Wage] are more evenly distributed across the income distribution, with the largest gains in the middle”, says the IFS.

Secondly, wage changes alone miss the bigger picture. Changes to taxes and benefits introduced by the government are set to affect people on the lowest incomes hardest, and this more than offsets the gains some workers get from increased pay as a result of the National Living Wage.

Inequality has been falling by some measures, but these trends are expected to reverse

No single measure can sum up what’s been happening to inequality in the UK in recent years. But we can get an idea by looking at a few examples.

Household incomes generally rose faster for those on lower incomes than those towards the top between 2007/08 and 2014/15. The IFS says this is because the recession in the late 2000s hit incomes hard, and households at the top were most affected by this as earnings make up a larger portion of their income. In addition, benefits tended to rise in real terms during this period so this benefited poorer households.

This trend is expected to reverse over the next few years—up to 2021/22—with lower-income households seeing smaller rises or even falls in their incomes after inflation. This is expected because of reductions to working-age benefits, along with expected rises in earnings—which again will tend to benefit higher income households.