Who will benefit from the UK’s new National Living Wage?

In 2016 the UK government is introducing its National Living Wage (NLW), which sees the minimum wage rise to £8.25 per hour, from its current £7.85 per hour. This wage increase will affect 4.5 million people when introduced, and 6 million employees—23% of all employees in Britain—are likely to have received some increase in their pay by 2020 as a result.

A new report by The Resolution Foundation finds predicts 25-30 year olds are likely to make up 20% of those affected by the NLW, and that it is expected to boost the wages of 29% of female employees by 2020, compared with 18% of men. This is likely to have a small impact on the mean gender pay gap, increasing the pace at which it narrows by up to one-fifth.

Lawrence Kahn writes in his article Wage compression and the gender pay gap, that “Wage-setting institutions such as minimum wages typically lift the bottom of the pay distribution, disproportionately raising women’s pay but also leading to adverse employment effects.” The evidence shows that raising the minimum wage for the lowest earners can reduce pay inequality, but it is not without risk.

The NLW has been criticized for forcing businesses to pay their employees more, to offset the government’s decision to slash benefits for low-paid workers. After taking tax and benefits into consideration, under half of the net income gains are set to flow to households in the bottom half of the income distribution in 2020. Therefore, the National Living Wage is unlikely to have as positive an effect on the earnings low-paid workers as anticipated.

Richard Dickens has written an article analyzing the different methods used to set minimum wages. In this article he writes, “One reason for the rising interest is the growing consensus among economists and policymakers that minimum wages, set at the right level, may help low-paid workers without harming employment prospects.” It is important that minimum wages are set at the right level to encourage growth and prosperity, without the side effect of reducing overall employment as businesses cannot afford to pay their workers the new rate, consequently increasing poverty.

IZA World of Labor has published numerous articles on the minimum wage and its effects on the labor market and the economy. Read more evidence-based articles on the minimum wage.