New ISER report for Low Pay Commission

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