What's happening to the Minimum Wage?

15 April 2013

It's official: from this October the new National Minimum Wage (NMW) will be set at £6.31 an hour, up from £6.19 an hour at the moment.

The NMW is set at different levels according to age-groups: adults 21 and over get the full adult rate, 18-20 year-olds get the Youth Development Rate (which will be £5.03 from September), 16-17 year-olds get a lower rate (to be £3.72) and apprentices have their own rate (to be £2.68).

Anyone pleased with today's outcome has the Low Pay Commission to thank for recommending the new rates and the Government for adopting most of them. The Commission was set up by the 1998 Act and is tasked with recommending minimum wage rates to the Government and undertaking relevant research and consultation around the issue.

But not everyone seems to be pleased with this outcome, as claims such as this demonstrate:

"In real terms, NMW lower than 2004. Striking that neither Labour nor coalition yet used it to 'make work pay'"

Is this true? The Low Pay Commission themselves are the place to go for this sort of information. Their 2013 report is the culmination of a huge variety of statistics that interested readers would do well to spend a moment or two browsing through.

Here are just a few, starting with the claim at hand.

We know first of all that the minimum wage - in cash terms - is going up. In fact it's been constantly rising since it was first introduced, and the lower rates have either risen or stayed the same:

If we want to know what these rises mean in context, however, we've got to compare this to prices and wages. The Commission measures this with their own estimates, which adjust the value of the adult minimum wage against average weekly earnings and the Consumer (CPI) and Retail Price (RPI) Indices (measures of inflation).

CPI and RPI differ in terms of how they're calculated, and the CPI doesn't include Council Tax and other housing costs. The Commission's chart shows how these relate to the NMW:

*Note: the y-axis on this graph from the LPC doesn't start at zero, so the size of the trends will be slightly exaggerated

The chart compares the current adult wage of £6.19 per hour to previous rates relative to prices (blue and green lines) and average wages (red line - AWE). One of the obvious messages is that between 2000 and 2006 the minimum wage rose on all counts - in cash terms and ahead of prices and wages. In other words, people on the NMW were getting richer relative to the prices they were paying and relative to average earners.

Since 2006, prices have tended to rise faster than the NMW, hence the general slump in the blue and green lines over the last six years. However since average earnings have risen more slowly during the economic downturn, the NMW continues to creep up at a marginally faster rate. At present, anyone earning the NMW earns 41% of the average weekly wage - an all-time high.

In any case, against prices the NMW is currently the same or slightly lower than it stood in 2004, and the latest rise (of 1.9%) - being below current CPI of 2.8% - will only set it back further in real terms.

That shouldn't necessarily obscure the bigger picture, which shows that since 1999 the NMW's rise has been, until recently, comparable even to GDP:

*Note: again, the y-axis on this graph from the LPC doesn't start at zero, so the size of the trends will be slightly exaggerated

The international picture

Finally, it's worth answering the question as to whether the UK is imbursing its lowest paid better than other countries. Data from the OECD statistics database and compiled by the Commission shows this both relative to wages and prices. For both, the UK stands in a below-average position compared to other major economies that have similar policies (although the age at which adults can receive the rate varies by country).

As an example, the NMW rate relative to wages places the UK at a similar rate to the Netherlands (having lagged behind most other economies at the NMW outset in 1999):


In cash-terms, the minimum wage is up. This is nothing new. In real terms, claims that we're back to 2004 price levels are correct, and the latest rise is also likely to be outpaced by inflation. That said, this isn't a 'squeeze' happing only to the lowest paid. Minimum wage earners continue to take home an ever growing portion of average weekly earnings as workers across the board put up with slower pay increases, or even freezes.

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