Minimum wage to rise by 9.8% and cover all workers aged 21 and over

The full adult rate of the National Minimum Wage, known as the ‘National Living Wage’ or NLW, is to rise from £10.42 to £11.44 from 1 April next year. The increase is worth 9.8% or 0.1 percentage points greater than last year’s rise of 9.7% and represents the largest ever cash increase in the statutory floor, according to the Low Pay Commission (LPC), which recommended the increase. The NLW will also cover 21 and 22-year olds for the first time. It previously covered only those aged 23 and above. The rise is aimed at meeting the Government’s long-term target for the legal minimum to be worth two-thirds of median earnings for those aged 21 and over by 2024. 

The increase will bring the current phase of development of the minimum wage to an end. A new administration following next year’s general election could prompt further evolution in this important regulation. The increase also means that the NLW will remain around 50p lower than the voluntary living wage (VLW), which currently stands at £12 an hour. The VLW is calculated by the Resolution Foundation on behalf of the Living Wage Foundation. It represents the amount that is estimated to provide a ‘socially acceptable standard of living’, and as such takes greater account of the cost of living than the NLW.

The main labour market factors cited by the LPC as reasons for the coming increase in the NLW were that despite falling vacancies, demand for workers is resilient and shortages remain. Inflation and the tight labour market had driven up pay, though these forces are now softening. The LPC said that the fact that more jobs are paying above the NLW, with more workers escaping the wage floor, suggests a tight low-paid labour market. But despite the rising NLW, low-paid workers continue to face challenges in the workplace. In particular, the LPC heard from workers and their representatives that the rising minimum wage had not been enough to avoid growing hardship. Other evidence showed that workers in low-paying industries continued to struggle to secure sufficient regular hours. The LPC said that for many, the unpredictability of their working time exacerbated their financial challenges.

Employers continue to absorb the rising NLW via reduced profits or where possible, passing it on to consumers through higher prices. Cutting employment has been much less commonly reported – and is more often done via reduced hiring rather than redundancies. This remained the case in 2023 – although the frequency of reported price pass-through has risen markedly in the past two years. The LPC’s assessment is that even if firms passed on all the cost of NLW increases – an improbable scenario – this would have a very small impact on overall inflation (increasing it by up to 0.3 percentage points). And there remain large low-paying sectors – social care and childcare in particular – where employers’ ability to pass on increased costs is highly constrained.

One effect of the rapidly rising NLW has been to prompt (some) employers to reduce the differentials between their lowest-paid staff and those immediately above them in pay structures. The LPC tracked industry-level differentials within various low-paying industries since 2015 and found that the difference between the median and 10th percentile of pay fell dramatically within all low-paying industries between 2015 and 2019. For most industries, they also fell between 2019 and 2022. However, between 2022 and 2023 industry-level differentials stabilised. The LPC comments: ‘It is possible firms cannot reduce differentials further without affecting recruitment and retention. If firms choose to maintain differentials, it makes absorbing NLW rises more costly.’