Sunday, 21 September 2014

Analysis: £8 an hour by 2020 - how good is it?


Andrew Fisher gives us a first take on Labour's policy announcement that it will raise the national minimum wage (NMW) to £8 an hour by 2020

In May last year, we showed that if the minimum wage had kept pace with inflation in the previous five years it would be £6.76 per hour instead of its current £6.31 - enough to make a full-time worker on the NMW better off by £1,097 a year. Next month the NMW will rise to £6.50 per hour.

If we take the 2014 level of £6.50 as the baseline the Bank of England's target inflation rate of 2% as the average increase, then we could expect the NMW to be £7.32 per hour by 2020. Even if we took the current rate of RPI inflation (2.4%) that would lead to the NMW being £7.49 in 2020 - as the table below shows:
So under Labour's plan a NMW worker would be either 68p or 51p better off an hour. If they worked full-time, then they might be either £1,326 or £995 better off a year under Labour's proposals than would otherwise be the case.

But wait a minute ... if the NMW had increased with RPI inflation in recent years then it would be rising from £6.76 to £6.94 in October. If we take that as our new baseline we see under the 'RPI scenario' it would be £8 per hour in 2020:
 

So effectively - one could argue - Labour's announcement is actually just putting the NMW back in line with the cost of living ... by 2020. Nevertheless, this wouldn't happen on it's own and Labour is to be commended for returning to the late 1990s/early 2000s scenario when consecutive NMW increases met or exceeded inflation.

However ... Labour has said nothing about removing the appallingly low youth rate NMW - will over workers over 21 be entitled to £8 per hour? How much for younger workers?

But is it a Living Wage?

And on another level - it compares unfavourably with the living wage. £8 per hour is already far below the £8.80 per hour London living wage endorsed by Tory London Mayor Boris Johnson. The UK-wide living wage is £7.65 for 2014

If we project the living wage forward to 2020, we see Labour's £8 minimum wage looks rather less impressive:

It therefore fails the Bob Crow test:


So is £8 an hour by 2020 a good thing? Yes.

Will it eradicate poverty pay? No.

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