Last year’s 25th anniversary of the minimum wage was a low-key affair. In one of his final appearances as chief executive of the Resolution Foundation, Torsten Bell posed with a celebratory cake. And that was about it.
Within weeks, Bell would be a Labour MP and now finds himself junior minister in the Treasury where he is well-placed to keep an eye on the national living wage, as it became nearly a decade ago.
The muted anniversary celebrations reflected the fact that, in an age of increasingly fractious politics, the minimum wage represents an example of consensus, having established itself as an uncontroversial part of the UK’s economic furniture.
Nearly 1 million people in the UK earned less than £2.50 per hour in 1997. Today, no political party would risk opposing the principle of a wage floor, established in April 1999 when Labour introduced the minimum wage at £3.60 per hour for anyone 22 or over. But it was not always that way.
Back in the late 1990s, employers and Conservative MPs argued fiercely that it was likely to cost jobs and even ruin the UK economy. Then-opposition treasury spokesperson (later defence secretary) Michael Fallon told parliament the minimum wage would “increase inflation, add to public spending, hit school and hospital budgets, damage competitiveness, hammer small businesses… and discourage people from adding to their training and seeking higher qualifications”, adding: “Above all, it will cost jobs.”
History has proven them wrong.
According to Nye Cominetti, principal economist at the Resolution Foundation, the minimum wage has increased pay at the bottom end of the labour market without making any significant difference to employment.
In 2024, 3.4% of UK workers were paid less than two-thirds of median hourly wages – down from 21% in the early 2010s. “The minimum wage has transformed the low pay landscape,” says Cominetti. “Low pay has almost been eroded.”
Time to rebrand
The big change came in 2016 when, following an earlier Damascene conversion in favour of a wage floor, the Conservatives rebranded it as the national living wage. For the past nine years, the NLW and the lower-value national minimum wage (NMW – paid to younger workers) have generally risen faster than inflation and average earnings.
The NLW is currently worth £12.21 for anyone aged 21 or over, up 6.7% from 2024-25. Young people aged 18-20 must receive at least £10 per hour, while under-18s and apprentices are entitled to a minimum of £7.55.
Rates are recommended by the Low Pay Commission, set up in 1997 to oversee the minimum wage system and, in effect, be a de-facto bargaining forum for employers and unions. It was the creation of the commission, says Matthew Percival of the Confederation of British Industry, that helped convince employers they had less to worry about.
“Employers’ fears were reduced by the fact we didn’t have a process that put jobs at risk,” says Percival, the CBI’s workforce director. “The minimum wage was coming and was going to have to work for everyone.”
Commission recommendations reflect living costs, the jobs market and, since 2016, targets set by ministers. It is rare for the commission’s recommendations to be rejected, although in 2013 the then business secretary Vince Cable threw out a LPC proposal to freeze the apprentice rate and instead raised it by 3p per hour.
By 2020, the NLW’s so-called ‘bite’ had reached 60% of median earnings, achieving a target set five years earlier by former chancellor George Osborne. To mark its 20th anniversary, the LPC calculated low-paid workers were about £5,000 per year better off in real terms than if the minimum wage had not been introduced.
The NLW should have reached two-thirds of median earnings in 2024-25, but data from the Office for National Statistics subsequently showed median earnings to be higher than expected. “The LPC has to set the minimum wage before it knows the actual median,” explains Nye Cominetti.
Setting the wage floor
Even when the two-thirds target is reached, probably this year or next, trade unions and others will push for a higher wage floor. The TUC is calling for the NLW to reach three-quarters of median earnings by 2030, or £15 per hour.
Current LPC members include a former trade union official, leading business figures and a member of the prison service pay review body. Its recommendations follow talks with employers and workers around the country, including visits to factories and other workplaces.
Sampson Low, head of policy at Unison, says the setting of a legal wage floor for all employees has confounded concerns and transformed life for workers. “The Low Pay Commission deserves credit for sticking to its goals,” he says.
Comparing the minimum wage or NLW with wage floors in other countries comes with caveats, mainly because of variations in purchasing power. In 2023, an OECD analysis placed the NLW eighth in value, behind countries such as Germany, France and Australia, but ahead of Spain, Canada and Japan. At the time, the US minimum wage (set by the federal government – some states set higher floors) was only worth a little more than half as much as the UK’s.
Countries also have contrasting policies on youth rates. Germany has no minimum wage for under 18s, then applies the same rate to all adult workers. The Netherlands and Australia have different bands for each year from age 15 to 20.
In April, the NMW for 18-20 year olds in the UK rose by 16.3%, bringing it closer to the adult rate. Within the course of this parliament, Labour is committed to creating a single NLW for all adults, though under-18s and apprentices might still be paid less.
A single adult rate could struggle to gain consensus across the political spectrum as well as facing opposition from employers in sectors such as hospitality and retail, where students and other young people make up sizeable parts of the workforce.
Charles Cotton, the Chartered Institute of Personnel and Development’s senior adviser on pay and reward, says: “There may be issues if people with seven or eight years’ experience find themselves earning the same as younger workers.”
Funding fears
While the minimum wage may not be costing jobs, it must still be funded. “All the expectations were that, if the cost of hiring people went up, then productivity would go up,” says Matthew Percival. “[Instead] most of the minimum wage has been funded through consumer price increases.”
But the Low Pay Commission disputes this. In an analysis last year, looking at the future of the minimum wage, the LPC concluded: “There is no evidence that the NLW is a significant driver of inflation. Other costs, such as energy and food, have much greater impact.”
Some firms pay more than the NLW, mainly to be seen as better employers and guard against skill shortages. Since 2010, more than 16,000 employers have pledged to pay the real living wage, currently £12.60 outside London and £13.85 in the capital.
These include FTSE 100 companies and national names such as Aviva, Nationwide and Ikea, as well as three Premier League football clubs. To gain accreditation from the Living Wage Foundation, employers must not just pay the RLW (as calculated by the Resolution Foundation) but offer secure jobs and fair working conditions.
While the gap between the NLW and RLW is just 39p per hour outside London, this equates to as much as £760 per year, assuming 37.5-hours of work per week. “There is a real appetite to go beyond the statutory minimum and adopt fairer working practices,” says Klervi Mignon, research officer at the LWF.
When chancellor Osborne rebranded the minimum wage as the living wage in 2016, it was, says Mignon, a back-handed complement for the foundation, set up six years earlier. By focusing on working practices alongside pay, the LWF recognises that, while lower-paid workers are entitled to more money than in the past, the growth of the gig economy does not necessarily mean they are better off.
The foundation’s ‘living hours’ standard calls for employers to give staff a contract stating the hours they work, four weeks’ notice of shifts, compensation if shifts are cancelled within this period, and at least 16 hours employment per week.
The employment rights bill, currently going through parliament, does not go as far as the LWF’s standard, requiring employers to offer only ‘reasonable’ notice of shifts and ‘proportionate’ compensation when shifts are cancelled.
The CBI remains sceptical about the bill, claiming changes to zero-hours contracts and other reforms are too prescriptive and will raise costs. It also accuses ministers of refusing to engage in meaningful discussions in the same way as the government did before introducing the minimum wage.
Although the NLW has increased salaries for lower paid workers, it is not generally seen as the most effective way of tackling poverty. Workers on the NLW do not necessarily live in poorer households, says Cominetti, and changes to the benefits system can have more impact on overall poverty.
Attila Lindner, a professor in economics at University College London and co-author of a 2021 study into the minimum wage, concurs. “There are many other ways to fight poverty for people who are not working,” he says. “For people with a job, it’s definitely improved living standards.”
Up the pay ladder
As the NLW increases in value, cost is not the only conundrum for employers. There is also the problem of pay ‘compression’, as salaries of the lowest paid staff move closer to those earning slightly more, including line managers or supervisors.
Last year, the Low Pay Commission noted an increasing number of businesses and some unions saw pay compression as reducing incentives for workers to seek promotion or take on roles with greater responsibility.
“The tensions are there,” says the CBI’s Matthew Percival, adding that companies tend to stress wider benefits of promotion, including the opportunity to take steps up the pay ladder at a later date.
Compression also affects the public sector. In its most recent submission to the LPC, the Local Government Association warned councils face a challenge in maintaining a meaningful gap between the NLW and higher pay grades.
In spite of changes at the bottom end of the local government pay scale, differentials between the NLW and the lowest pay point remain minimal, added the LGA.
As arguments over the employment rights bill rumble on, it is worth remembering that power shifts between workers and employers do not always have the impact that was forecast. At the same time, employers are bound to worry about payroll costs, just as employees are concerned about the cost of living.
In March, the Resolution Foundation forecast the combined effect of the increase in employers’ national insurance contributions and the minimum wage increase could reduce total employment by 85,000.
In future, it added, the LPC should recommend rises in the NLW and NMW following the autumn Budget rather than before it, so the LPC is aware of any tax changes.
The Resolution Foundation also proposed that, for the foreseeable future, the ‘bite’ of the minimum wage should only rise by one percentage point per year (half the pace by which it rose from 2016 to 2024).
It also urged the government to maintain youth rates. “Higher employer NICs have of course made it harder for employers to afford the minimum wage increase,” says Cominetti. “Normally we’d expect employers to pass on much of any increase in payroll taxes to their workers in the form of lower real wages, but the minimum wage prevents this adjustment for low paid workers.”
While the argument for a minimum wage has been won, he adds, the value of having a wage floor has come up against economic reality. “It is harder to have an ambitious wage policy if you’re pushing up costs through the tax system,” he adds.