Katherine Heffernan | 01 Apr 2022

Higher increase in NLW rates reflects tighter labour market

The National Living Wage (NLW), the statutory minimum hourly pay rate for all workers aged 23 and over, rises by 59p or 6.6% to £9.50 today, following a much smaller increase of 2.2% last year. The Low Pay Commission (LPC), in its report setting out its rationale for the latest increases, pointed to recovery in the economic situation and the labour market as well as a degree of optimism that the closure of the Coronavirus Job Retention Scheme would not lead to a large spike in unemployment, something that has since been borne out.

Minimum rates for many of those aged below 23 are increasing by higher amounts still: the National Minimum Wage (NMW) for 21- and 22-year-olds rises by 9.8% (72p), as an initial step towards the eventual expansion of the NLW to all those aged 21 and over. And the apprentice rate, which applies to apprentices aged 16 to 18, as well as older apprentices in their first year of training, has gone up by almost 12% to £4.81, bringing it into line with the new NMW for 16- and 17-year-olds. Set against these rises, 4.1% increases in minimum rates for workers aged 16 to 17 and 18 to 20 may appear to be somewhat modest but are nonetheless still ahead of the median pay award across the wider economy, although our monitoring has also seen this starting to rise (to 3.0%, according to our latest data) following an lengthy period at 2.0%.

The latest increase brings the National Living Wage closer to the Real Living Wage, which is currently estimated to be £9.90 for all workers aged 18 and over outside of London. This represents an increase of 4.2% from its previous level of £9.50, with the new rates advised in November 2021. Since accredited employers have six months to apply the increase, there is potential for the two rates to overlap this month as it is possible that some organisations may continue to pay the lower £9.50 rate until 1 May.

In its report, published in December last year, the LPC stated that the rise in the NLW was ‘greater than the anticipated rise in inflation, meaning living standards should be protected and those on the NLW should see their pay rise faster than average.’ But with both RPI and CPIH inflation at their highest levels for at least 30 years (8.2% and 5.5% respectively as at 23 March), much of this intended benefit may end up being subsumed by sharp increases in the cost of staples such as fuel and food. We have already observed organisations in low-paying sectors such as retail and hospitality respond to staffing shortages with off-cycle pay awards: for example, Poundstretcher implemented a 10% pay increase for existing employees in January, while Moto brought its pay review forward to December and awarded an increase of 7%. Meanwhile other organisations have implemented two pay reviews instead of one, effectively increasing pay rates in two stages. Examples include Costa Coffee.

 This year’s higher increase in the NLW is intended to put the rate back on course, and on a smoother path, to meet the target set out in the LPC’s remit of two-thirds of median earnings by 2024. At present, the LPC’s central estimate is for the NLW to reach £10.14 next year (an increase of 6.7%) and £10.70 (5.5%) in 2024. The latter forecast is some 37p higher than the previous estimate; however, given pandemic-related complications with the data on which it bases its predictions, the LPC reiterated that the path was ‘highly uncertain’ at the time of writing and that the Bank of England’s estimate, of £10.61, was more likely. It hopes to have a clearer view of the path this spring. (The Office of Budget Responsibility’s forecast for the NLW 2024 rate, meanwhile, is £10.54.)