The Chancellor just used his Conservative Party conference speech to announce that the UK could become one of the first major economies to “end low pay”.
What does this mean – and what’s the catch?
Sajid Javid’s exact words were: “Over the next five years, we will make the UK one of the first major economies in the world to end low pay altogether.
“To do that, I am setting a new target for the National Living Wage, raising it to match two-thirds of median earnings. That means on current forecasts, this ambitious plan will bring the National Living Wage up to £10.50, giving 4 million people a well-earned pay rise.”
“Low pay” has a specific meaning here. The OECD defines it as less than two thirds (66 per cent) of the median average earnings across the country.
The National Living Wage – brought in by the Conservatives in 2015 – is currently on track to reach 60 per cent of the median by 2020.
So a rise to 66 per cent would indeed give low earners a rise in their hourly pay, and Mr Javid also announced that the minimum age for the National Living Wage would ultimately be lowered from 25 to 21.
Judging by OECD figures, a 66 per cent living wage might well put the UK towards the top of the pay scale for major advanced economies.
Since the National Living Wage is pegged to average earnings, it’s impossible to say precisely what it will be in advance, but the Office for Budget Responsibility publishes forecasts.
The OBR thinks the wage will hit £9.49 an hour by 2023. There’s no forecast for 2024 but the wage is predicted to rise by around 30p a year, so if that trajectory continued, we would be at around £9.79 an hour.
So Mr Javid’s promise of £10.50 might add around 70p an hour to what low earners would have expected to get anyway, but this can only be a rough estimate.
The Treasury website adds a note of caution to this announcement, saying the rise will go ahead “provided economic conditions allow”.
This could provide some wiggle-room for the Chancellor’s plans to change if the economy deteriorates.
Last year’s budget said the government “has an aspiration to end low pay”, and the last Chancellor, Philip Hammond, let it be known in May this year that a rise to 66 per cent was on the cards.
This suggests that the Treasury has been mulling the increase for some time, although today’s announcement is the first confirmation of the policy.
Mr Javid’s guns were slightly spiked by his Conservative leadership rival Matt Hancock in June this year, when he announced a similar boost to the National Living Wage.
Today’s announcement will come as no surprise to people who take an interest in the National Living Wage: the government has been hinting that it would raise the wage as a percentage of median income for some time.
The policy will see more low earners take home more money per hour – but perhaps not dramatically more than they would have expected to get anyway on current trends.
Nevertheless, a national living wage of 66 per cent of median earnings would indeed put Britain among the first major advanced economies to end low pay, according to the OECD definition.
The Treasury have phrased this announcement slightly more cautiously than the Chancellor did in his speech, adding the words “provided economic conditions allow”.