The Low Pay Commission has published a new report, The
National Minimum Wage, the National
Living Wage and the tax and benefit
system
by Professor Mike Brewer and Dr Paola De Agostini, ahead of the launch of its latest recommendations to the Government.
The research project had five aims:
-
To show where families containing NMW and NLW recipients are in the income distribution
-
To show the importance of earnings from the NMW and NLW to families containing NMW
and NLW recipients -
To show how families containing NMW and NLW recipients are likely to be affected by
future rises in the NLW, and by announced but not yet implemented tax and benefit
changes -
To show how families containing NMW and NLW recipients would be affected by a
hypothetical further rise in the NMW and NLW, and how it would affect the whole
working-age income distribution -
To quantify the strength of the financial incentives to earn more faced by NMW and NLW
recipients, including an assessment of how many will be affected by in-work conditionality
in the long-run
The study uses data from the Family Resources Survey and the UK part of the EUROMOD tax
and benefit model to create a projection of the circumstances of NMW/NLW families that were observed in 2014-15 as if they were facing the
policies that the researchers expect to be in effect in 2020-21, as announced on or before the Spring 2017 Budget.
The study found that:
NMW families (that is, families that contain a worker who is receiving the NMW) are
mostly found in the bottom half of the working-age income distribution, and particularly in
the poorest 10%. NLW workers are more evenly distributed, and are most likely to be
found in the third decile. NLW families tend to be better off than NMW families because
they are paid more per hour, and they are more likely to live with a working partner.
NMW workers contribute more to their families’ income than do NLW workers. This mostly
reflects that NMW workers are more likely to be single than NLW workers. The
contribution of NMW and NLW earnings to NMW/NLW families’ net income falls as we go
up the income distribution. NLW workers in families in decile groups 3 or 4 contribute just
over a half of their families’ net income, on average.
Forecast increases in the NMW/NLW by 2020-21 will increase net incomes of NMW/NLW
families by about 1.5%, on average. Within these families, low-income NMW/NLW families
will gain by slightly more than high-income NMW/NLW families, except for the poorest
decile group, which contains very few NLW recipients.
The weakest financial incentives to work – i.e. the highest METRs – amongst NMW/NLW
workers are found in decile groups 2 to 4, where NMW/NLW workers can pay extra tax and
NICs and lose benefit entitlements when earnings rise. If the under 25s move onto UC in
line with our assumptions, then the poorest NMW workers could see very large rise in
METRs.
Under current rules for in-work conditionality, when universal credit is fully rolled-out,
around 21% of NMW/NLW workers will be subject to in-work conditionality
A 5% hypothetical rise in the NMW/NLW in 2020-21 would increase the net incomes of
NMW/NLW families by an average of under 1.2%. This is a lot less than 5% because some
of the rise is lost to extra tax liabilities and foregone earnings, and because some
NMW/NLW families have other sources of income. Amongst NMW/NLW families, the
poorest families would gain a larger fraction of their income, on average. A rise in
NMW/NLW would also look progressive amongst all working-age families where someone
is in work, but not amongst all working-age families or the whole population, because it
does nothing to directly benefit non-workers.
Download the report