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Will a £9 National Living Wage promise be sustained?

March 17, 2016

The trouble with long-term political pledges is that they often get taken over by short-term economic swings.

Last July, most of us were rather stunned by George Osborne’s pledge of a £9 ‘National Living Wage’ by 2020.  This figure was not quite plucked out of thin air: it’s based on the aim of setting it at 60 per cent of average wages for over-25s.  On that basis, with projected wages growth, the NLW would have been £9.35 by 2020, giving some wiggle room in meeting the political commitment.

There’s just one snag. This is that the average wages forecasts on which all this is based, made by the Office for Budget Responsibility, seem to be based on a rather optimistic approach. They always seem to show that, in the relatively foreseeable conditions of the coming year or two, there will be quite modest wage growth of one or two per cent, but in the longer term, the best guess is that they return to their long-term historic growth levels of three or four per cent a year. Looking over a five year period, this gives pretty healthy cumulative wages growth of around 15 per cent or more.

This expectation of a sustained period of steady growth in wages, however, seems constantly to recede into that imaginary future. As the Institute for Fiscal Studies has just pointed out, the OBR’s downward revisions of wages growth this week could hit general living standards. But will it also force the government to revise its commitment to a £9 NLW by 2020?

The immediate answer is “not yet”. So far the revisions since last summer put average wages about three per cent lower in 2020 – just about within the “wiggle room” the Chancellor gave himself. But any further downward revision will leave him with two alternatives: break the £9 promise, or increase even further than promised the level of the National Living Wage relative to average pay.

So in 2020 we can all still hope that pay will rise both generally and, more rapidly, for the least well paid over-25s. But unless things go pretty well from now on, maintaining current commitments will be tough. This will be a big test of how robust is the government’s new-found commitment to improve pay at the bottom.

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