Six findings from the national living wage review

The Low Pay Commission's review of the national living wage found it has reduced regional pay inequality and contributed to narrowing gender and ethnicity pay gaps, but it has not led to higher incomes and or any measurable increase in productivity.

The national living wage (NLW) was introduced in 2015 and aimed to increase pay and productivity, while reducing the government's spend on benefits.

However the review, which examined what the NLW has achieved from 2016 to the start of the COVID-19 pandemic in 2020, found that its potentially positive impact on workers' incomes has been hampered by other factors.

In April 2020 the NLW reached its initial target of 60% of median earnings for workers aged 25 and over, but a higher target of 66% of median earnings for all workers aged 21 and over is now in place for 2024.

Bryan Sanderson, chair of the Low Pay Commission, said: "As we continue to push the minimum wage towards its new target, it is important we learn the lessons of recent history. This review is a timely reminder of the policy's achievements, as well as its limitations.

"The NLW can be a judged a success in reducing pay inequality, and fears around job losses did not come to pass. Productivity improvements, however, were elusive and the impact on workers' incomes was tempered by other factors.

"The headwinds faced by businesses and workers alike are greater now than at any point since the NLW's introduction. Today's report emphasises the need for a balanced and flexible approach in supporting both, of which the minimum wage is an important, but not the only part."

Here are the six main findings of the review.

1. Wages increased, but employment did not

The hourly NLW increased twice as fast (26%) as median hourly pay for workers aged 25 and over (12%) between 2015 and 2019. This reduced hourly pay inequality overall within and between each nation and region in the UK.

Between 2015 and 2019, the NLW increased pay for up to 35% of jobs, including 7% of payrolled jobs paid the NLW in 2019 and a further 28% for whom pay was higher in 2019 than it would have been if the NLW had not been introduced.

However, any effects on the employment rate were "muted". Lower-paying firms saw lower job growth than similar companies paying higher wages.

2. Incomes did not increase

While households with at least one NLW worker saw their household earnings increase by more than other households (31%, compared with 20%, between 2015/16 and 2019/20), this was offset by losses of in-work benefits such as tax credits or Universal Credit. This was due to their tapering as incomes rose and a freeze in benefit levels.

3. The NLW did not increase productivity

The national living wage review found no evidence to suggest that the NLW has increased productivity growth in regions and industries where the NLW is most prevalent.

The LPC says that productivity gains require costly investment, which some smaller employers may have not been able to afford alongside annual uplifts to the NLW. Only a minority of organisations opted to give staff more tasks, required more flexibility on hours, tightened restrictions on absenteeism, increased the pace of work or raised performance standards.

4. NLW workers were less likely to move employers, but saw their pay increase

Workers often see their wages grow if they move jobs, but the annual uplift to the NLW rate made staying in the same job more attractive.

Each year around 40-50% of minimum wage workers see a pay increase that moves them off the wage floor. The NLW temporarily reduced the share of workers progressing off the minimum wage in 2016 but progression rates returned to normal levels from 2017 to 2019.

5. The NLW helped reduce inequality

The NLW reduced hourly wage inequality between regions and nations of the UK, with areas with the lowest pay on average seeing the largest increases.

Across the whole of the UK pay growth was highest at the 10th percentile, driven by increases to the NLW. These increases ranged from 17% in London to 22.5% in Northern Ireland.

6. Gender and ethnicity pay gaps reduced among low paid workers

Women are more likely to be paid the NLW than men, therefore uplifts to the rate benefitted women more than men. The gender pay gap at the 20th percentile fell from 9% in the first quarter of 2016 to 7% in the first quarter of 2020.

In the first quarter of 2020 the range of hourly pay in 20th percentile by ethnicity was 8.7%, compared with 15.1% in the first quarter of 2016. However, while the gap is closing for some groups it is not for others.