04 April 2016

When in 2010 we asked political science academics to nominate the ‘most successful policy of the last 30 years’, the undisputed winner was the National Minimum Wage. But, Jill Rutter argues, the arrangements that led to it being a policy success may have been mortally wounded by the Chancellor’s decision to impose a new National Living Wage which came into effect last week.

When we brought together those who had worked on implementing the minimum wage, Chris Pond, of the Low Pay Unit pressure group (one of the few early protagonists of a minimum wage in the UK), told us that ‘back in the 80s, the minimum wage wasn’t controversial at all. Nobody thought it was a good idea.’

Trade unions were opposed. Business was opposed. And when the idea finally got enough traction to appear in the 1992 Labour manifesto, the proposal to set the minimum wage at half male median earnings, rising over time to two thirds, proved to be an electoral albatross.

Over the next five years, Labour modified the proposal – the 1997 manifesto proposed not a ‘rigid’ figure but new machinery to set the minimum wage, which was to be ‘according to the economic circumstances of the time and with the advice of an independent Low Pay Commission (LPC), whose representatives will include representatives of employers, including small businesses, and employees.’

The LPC was established after the 1997 election to advise the Government on the level of the National Minimum Wage. It was composed of three groups: employers, employees and independents with an independent chair, supported by its own research capacity. That tripartite formula, combined with growing expertise on the functioning of the bottom end of the labour market, proved to be the basis for a political consensus around both the minimum wage and the machinery over the next 17 years.

Within the LPC, there was agreement that they needed to reach internal consensus, to avoid handing the decision back to the politicians. Then-Secretary of State for Trade and Industry (now known as Business, Innovation and Skills) Margaret Beckett described how she had to persuade my colleagues that we should put through the Low Pay Commissions report entirely un-amended. It seemed to me that that was the simple, straightforward political choice and it meant that none of my colleagues needed to get involved in the detail... to any great degree. You could say the Low Pay Commission has done the work, and they say that this will work, and that’s why we have this figure etc., etc.’

Roll forward to the May 2015 election, one of Labour’s headline election promises  was to increase the minimum wage to ‘£8 an hour before the end of the Parliament’ while using incentives to promote the living wage. Not a mention of the role of the LPC and what former Labour adviser Dan Corry described as the successful ‘social partnership’ arrangements for setting wages.

Two months later, the Chancellor pulled out his Living Wage rabbit out of his Budget hat. He announced: ‘I am today introducing a new National Living Wage. We’ve set it to reach £9 an hour by 2020. The new National Living Wage will be compulsory. It will start next April, at the rate of £7.20.’

But unlike Labour, he did see a role for the LPC on the living wage. He added that the LPC ‘will recommend future rises that achieve the Government’s objective of reaching 60% of median earnings by 2020’ – and it would still set rates for the under-25s. But for the effect on jobs, he quoted the Office for Budget Responsibility, not the LPC forecasts – ignoring the latter’s expertise.

It doesn’t take much effort to work out that when the starting point and end points are set, the scope and role for LPC advice is hugely diminished. Some argue that once the living wage is reached in 2020, the LPC might bounce back into relevance – but so far there is no commitment to do so.

The danger for the LPC is that over time its existence, with this diminished responsibility, becomes harder to justify – and the Chancellor in 2020 decides that he will just set the course of the living wage for the next Parliament as well.

As we have documented before, quangos die when they overreach, suffer from extended scope creep or alienate their political base. But the LPC may have suffered for a different reason – so much part of the accepted political furniture, neither the Government nor the Opposition bothered to think through the implications of announcing their own wage targets for the body they had set up to advise them.

This British ‘policy success’ now risks ending up as a case of political collateral damage.

Further information

Note: the LPC has published how it interprets its new remit.

There is also a very interesting story from the Financial Times on the Government’s failure to consult the LPC before the July 2015 Budget announcement of the introduction of the National Living Wage.

Read the Institute for Government’s report on The introduction of the National Minimum Wage (1998).

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