Millions of low-paid workers in the UK are to get a pay rise of 4.1% next year, as Rachel Reeves confirmed that minimum wage rates will go up as part of the government’s ambition to improve living standards.
The national living wage will rise from £12.21 to £12.71 an hour from April for over-21s, which the government said would increase the annual earnings of about 2.4 million workers by £900.
The minimum wage for 18- to 20-year-olds will increase by 8.5% to £10.85 an hour, narrowing the gap with older workers as part of the government’s commitment to “raise the floor” on wages for all workers.
The Treasury had been concerned about the increase in youth rates with some ministers and officials fearing that they could be “priced out” of entry-level jobs.
But the government has accepted the Low Pay Commission’s recommendations in full so that, the chancellor said, those on low incomes would be “properly rewarded” for their work. The minimum wage for 16 to 17-year-olds and those on apprenticeships will increase by 6% to £8 an hour.
“I know that the cost of living is still the number one issue for working people and that the economy isn’t working well enough for those on the lowest incomes,” Reeves said.
“Too many people are still struggling to make ends meet and that has to change. That’s why I’m announcing that we will raise the national living wage and also the national minimum wage, so that those on low incomes are properly rewarded for their hard work.
“These changes are going to benefit many young people across our country, getting their first job.”
Labour promised before the general election to scrap “discriminatory” lower minimum wage rates for younger workers so that all adults would be entitled to the same legal pay floor.
However, there are concerns within the Treasury, and externally, that combating unemployment among young adults would require the chancellor to stop short the process of equalising the minimum wage.
The Resolution Foundation sounded the alarm last month over a sharp increase in the number of 16- to 24-year-olds who are not in education, employment or training (Neet), urging Labour to change course on scrapping the youth rate.
It said the number of young people classified as Neet had risen by 195,000 over the past two years to reach 940,000 and the figure was poised to hit 1 million for the first time since 2012.
Youth unemployment is now 14.5%, up from 13.7% a year ago, owing in part to the continued impact of Covid and the cost of living crisis, but some inside government remain concerned the higher minimum wage effort may have also hindered young people who are trying to find work.
Businesses have also said they are struggling to take on workers because of the combined impact of last year’s national insurance rise and the minimum wage, alongside key elements of Labour’s employment rights package.
Critics say that the minimum wage has already increased by 40% over the past five years, from £8.72 an hour in 2020, and is now one of the highest in the world. They also warn that while it has risen, the average wage has stagnated.
The government argues the increases will benefit a total of 2.7 million young and older workers, and that it had struck the right balance between the needs of workers, affordability for businesses and opportunities for employment.
Paul Nowak, the general secretary of the TUC, said: “The government is delivering on its promise to make work pay. With living costs stubbornly high, an above-inflation pay rise will make a real difference to the lowest-paid.
“Putting more money in people’s pockets is good for workers and good for the economy as it goes straight back into our high streets and local businesses.
“And sticking with plans to scrap youth rates is absolutely the right call. Young workers have bills like everyone else and deserve a fair day’s pay for a fair day’s work. It’s right they see a larger rise as youth rates are phased out.”
The Resolution Foundation welcomed the national living wage rise but said the “unnecessarily big” increase in the rate for 18 to 20-year-olds could make it even harder for them to find work.
The thinktank called for a rethink of the Low Pay Commission’s wage-setting process, arguing that the rise in unemployment should have prompted a more conservative response to the youth rate. It also suggested the government should move away from its ambition to have a single rate for adults.
Nye Cominetti, an economist at the foundation said: “Younger workers are set for even bigger pay rises, but these steep increases risk causing more harm than good if they put firms off hiring and push up Neet rates.
“The minimum wage has good reason to claim to be Britain’s biggest policy success in a generation. But at its higher level the government and Low Pay Commission need to act with more flexibility when setting rates so they can respond to changing labour market conditions.”
A year in Westminster: John Crace, Marina Hyde and Pippa Crerar. On Tuesday 2 December, join Crace, Hyde and Crerar as they look back with special guests at another extraordinary year, live at the Barbican in London and livestreamed globally. Book tickets here
