The Low Pay Commission (LPC) has been given the remit for 2025 by the UK government. They have asked the LPC to keep the National Living Wage at two-thirds of median hourly pay.
Though the final recommended rate is agreed by Low Pay Commissioners through a negotiated process, they provide guidance on what kind of increases are consistent with the remit from the Government.
To do this, the LPC project a range for next year’s National Living Wage (NLW, the minimum wage for workers aged 21 and over). They currently estimate this will be between £11.65 and £12.18, with £11.89 as a central estimate.
They make the recommendations in October each year, and the new rates come into force the following April. The recommendations cover both the NLW for workers aged 21 and over, and separate rates for young people and apprentices. For these other groups, the Government has asked the LPC to raise the minimum wage as high as possible without damaging the employment prospects of the affected workers. For the NLW, though, the approach is different.
Since 2016, the Government has asked the LPC to set the NLW according to a target relative to median hourly pay. First, it asked to raise the NLW to 60 per cent of median hourly pay by 2020, then to two-thirds of median pay by 2024. Having reached the two-thirds target, in this year’s remit the Government asks to maintain the NLW at two-thirds of median hourly pay in 2025.
Since the Government has asked the LPC to make a recommendation with reference to median hourly pay, they can give workers and employers advance guidance to roughly what the rate might be. To do this, we need to estimate what median hourly pay will be next year.
The process first making a projection of the 2025 National Living Wage is in three steps:
Step 1: Estimate baseline median hourly pay
They take the most recent estimate of median hourly earnings from the Annual Survey of Hours and Earnings (ASHE), an employer survey of 1 per cent of employees in PAYE as our baseline. The latest (April 2023) estimate of median pay for workers aged 21 and over was £15.98. When the LPC make our recommendations in October 2024, they will have a new baseline from April 2024.
Step 2: Estimate pay growth from baseline median hourly pay
Next, they estimate pay growth from the baseline (April 2023) to October 2025 (the target date). They use October 2025 as the target date as it is the midpoint within the financial year (2025/26) that the rate will apply. To do this they use two data sources:
- Initial projected growth in line with Average Weekly Earnings (AWE) total pay (12-month-on-12-month growth), where this is available (currently up to January 2024). They will have AWE data up to August 2024.
- They then use forecast growth in Average Weekly Earnings to project further out to the target date. Using the median of forecasts by HMT’s independent panel of forecasters, adding the OBR and the Bank of England. The latest data are from forecasts available in March.
This step gives an estimate of median hourly pay in October 2025.
Step 3: Calculate two-thirds of median hourly pay in October 2025
Finally, they go from this projected median pay to a projected NLW rate. This is done by taking two-thirds of the forecast of median hourly pay in October 2025. This gives a central projection of £11.89.
There is uncertainty around these projections, since they rely on a proxy for wage growth and forecasts. They display a range of projections around the central projection. This range allows for pay growth to be one percentage point faster or slower each year from the baseline.
What is the role of the social partnership?
Making recommendations on the minimum wage requires evidence and forecasts but also judgement. The Government’s target of two-thirds is not unconditional.
When the Commissioners meet in October 2024 to agree their recommendations they will consider the latest projections of median hourly pay, alongside all of the other evidence we collect over the year. This includes analysis of the impacts of recent changes, consultation responses and many meetings with affected workers and employers. Together, this will give Commissioners a broad understanding of the state of the labour market and economy. Commissioners will recommend the National Minimum Wage rates based on all of this information.
The strength of the Low Pay Commission is claimed to be its tripartite nature. The Low Pay Commission is made up of worker representatives, employer representatives and three independents (the Chair and two academic experts). The Low Pay Commissioners are considered to be well placed to make judgement calls, as they include experts and representatives of the key affected groups.
PAYadvice.UK 20/4/2024