Minimum wage has been killed by soaring inflation, finds report

Minimum wage is no longer useful because soaring inflation means its real value has fallen, a report has warned.

The landmark measure, introduced by the Blair government 15 years ago this week, has dropped in value in real terms in the past five years after being pegged to wages, which have not kept pace with inflation.

Professor Sir George Bain, the first chairman of the Low Pay Commission which recommends the minimum wage level each year, told the press that a ‘fresh approach’ is needed because it is not addressing today’s problems.

The minimum wage is currently set at £6.19 an hour and covers 1.1 million workers. It has usually risen in line with median pay, which has fallen behind inflation in recent years.

The study by the Resolution Foundation, a think tank campaigning for better living standards for the 15 million people on low and middle incomes, predicts the legal floor would rise to £7.12 an hour in 2017 – the equivalent of £6.12 an hour in today’s prices and less than the £6.33 an hour it was worth in 2004. The prediction is based on Office for Budget Responsibility (OBR) forecasts for wage growth. The foundation says that would mean “13 lost years” in the fight against low pay.

James Plunkett, the author of the paper called ‘Fifteen years later: A discussion paper on the future of the UK National Minimum Wage and Low Pay Commission’, said that the pay needed to be addressed.

The paper said: ‘Although extreme, exploitatively low pay has been nearly abolished, one in five workers still earn below £7.49 an hour (two thirds of median pay), just £13,600 a year for working full-time and too little to afford a basic standard of living.’

Professor George Bain added: “Of course, this doesn’t just mean saying the minimum wage should rise regardless of the economic context, nor that you can impose a statutory living wage in such a varied labour market. But in other areas of economic policy, from inflation to public debt, the government is much clearer about the UK’s long-term goals – and we have bodies like the OBR to guide us. With low pay carrying such high social and economic costs – remember that the minimum wage brings savings for the public purse – we should be asking if it deserves a similar, more long-term and more systematic approach.”

The foundation estimates that if everyone were paid the living wage, the Government would save £2.2 billion a year through higher tax and national insurance receipts and lower spending on tax credits and benefits.

Professor Bain is chairing a review of the minimum wage for the foundation. It is considering whether the Government should make tackling low pay a clear long-term goal of economic policy, with the Low Pay Commission advising on how it would be achieved. One option is for the commission to give more “forward guidance” on how the legal floor might be raised to give business more time to adapt.