The Low Pay Commission has recommended a 3 per cent increase in the UK minimum wage to £6.70 an hour, the biggest real-terms rise since 2007 but not enough to restore its pre-financial crisis value.
The LPC said the pace of the economic revival justified an increase that was higher than both inflation and average wage growth. Inflation has dropped to just 0.3 per cent while average weekly wages are growing at about 2 per cent a year.
The commission is an independent body of employers, unions and academics and, while the government does not have to accept its main rate recommendations, no government has rejected them in the 15 years since it was created.
“We have carefully weighed the risk of doing too little to raise the earnings of the lowest paid against the risk of recommending more than business and the economy can afford,” the LPC said.
Low wages have become an important issue as May’s election nears. They are seen by senior Tories as one reason why the party’s poll ratings have not risen in line with the economy. David Cameron, prime minister, urged employers to “give Britain a pay rise” in a speech this month.
Labour has said it will ensure that the national minimum wage would rise to £8 an hour by 2020, a policy that would undermine the independence of the LPC. Mr Cameron said this month the rate was “on a trajectory to over £8 an hour by 2020” in any case.
The minimum wage has not kept pace with inflation since the 2008 crash, but the proposed increase would restore about three-quarters of the real-terms value it has lost.
Average workers’ wages have fallen by more in real terms than the minimum wage, with the result that its value as a proportion of average pay is already the highest on record. About 1.4m people would be paid the proposed rate of £6.70, up from the 900,000 or so who were on the minimum wage in 2008.
The adult rate applies to adults over 21 and would take effect in October. The LPC also recommended a 3.3 per cent increase in the 18 to 20-year-old rate to £5.30 and a 2.2 per cent increase in the 16- to 17-year-old rate to £3.87.
However, the LPC warned its recommendations were made on the assumption that productivity growth – a missing piece in the recovery – would start to resume, while low oil prices would keep down employers’ input costs. “If these expectations are not borne out over the year, we will take this into account when considering next year’s recommendation.”
Business lobby groups welcomed the LPC’s recommendations but warned that the minimum wage should not become hostage to politics in the run-up to the election.
Katja Hall, deputy director-general of the CBI, said: “As the economic recovery cements, the commission has reconciled a desire to reflect this in pay packets while recognising that productivity growth – the key to sustainable pay rises – remains weak.”
Ms Hall said she welcomed the commitment to review next year’s recommended rise if the business environment did not improve, and warned that any increase in the minimum wage “due to political expediency” risked damaging one of the most successful government policies in recent years.
The Institute of Directors said the proposed rise would be manageable among its 34,500 members. “The vast majority of our members already pay their lowest paid more than the living wage,” it said.
The Trades Union Congress said the LPC should have recommended a bigger increase. “It is good that the minimum wage is set to go up more than average earnings, but if the recovery is really as strong and sustained as the chancellor claims, the commission could have been braver and given Britain’s lowest-paid workers a bigger boost.”
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