David Cameron promised and David Cameron delivered. Last year, the British Prime Minister told his people that “Britain deserves a pay raise.” And indeed, on Friday, more than a million British workers were given an increase in their pay as a higher minimum wage came into force.
The British Chancellor of the Exchequer George Osborne announced a “National Living Wage,” where those aged 25 and over will see their minimum pay jump from £6.70 ($9.63) to £7.20 ($10.30) an hour. The inflation-adjusted minimum wage has gradually been increasing in the last five years with the latest increase giving the UK a boost in annual minimum wage compared to its OECD counterparts.
Not all Brits are happy with the wage increase as it does not benefit all wage earners equally
Friday’s increase is the “biggest change” since its introduction in 1999 and is considered an economic experiment that is a result of the tight political debate on whether the country should leave the European Union.
13% Increase by 2020
Last year, Osborne announced a series of increases in the wage that will make it 13 percent higher than it would otherwise have been by 2020 in hopes that the change will boost productivity and create working conditions that are more rewarding than welfare payments.
A lack of productivity growth has held back the economy of late despite the jobless rate falling to a decade-low of 5.1 percent. As a result of the higher minimum wage, businesses in the typically low-paying hospitality, retail and social care sectors have already announced that said they might have to cut staff in response to the wage increase.
And they are not the only ones. In fact, seventy percent of economists polled predicted businesses will be forced to cut jobs as a result of the pay hike but 72 percent said the bump will boost productivity and increase economic growth as firms invest in technology instead and workers put in more effort.
Other Countries Raise Minimum
The U.K. isn’t alone in delivering or considering pay hikes. Germany last year introduced its first minimum wage and has since seen unemployment fall to a record low of 6.2 percent. Prime Minister Shinzo Abe has pushed for an increase in Japan, while President Barack Obama failed to convince the U.S Congress to back his call for a 24 percent hike.
The powerful minimum-wage movement by California lawmakers, however, succeeded in receiving the approval of the country’s highest statewide minimum wage—at $15 an hour by 2020. (It was boosted from $10 to $10.50 on Jan. 1.) New York legislators had already reached a deal to raise the minimum wage to $15 an hour, rising faster in New York City.
Not all Brits are happy with the wage increase as it does not benefit all wage earners equally. While a third of the workforce will get a pay rise, there is far less of an impact in other areas—including the already-expensive capital of London.
Furthermore, up until now, the minimum wage structure was split into four age-based categories, with the highest band set at 21 and over. The government’s new higher minimum wage created a fifth band—25 and over—who will benefit from the living wage. Those under 25 will be missing out on this pay hike. The increase will probably be felt more intensely at very small firms, where 16 percent of workers were paid less than 7.20 an hour until today compared with 5.2 percent at very large businesses.
Bank of England policy makers say that unless productivity keeps pace with wages, inflationary pressures will eventually build. However, they aren’t in any rush to raise the benchmark interest rate from a record-low 0.5 percent, where it’s been since 2009.
If the U.K. voters choose to leave the European Union in a June 23 referendum the pay increase could reach other sectors of the labor force. A Brexit decision could reduce the flow of immigrants who create a downward pull on pay levels and this would directly affect the job market.