Low Pay Commission summary of evidence 2023
Published 21 November 2023
1. Introduction
The Low Pay Commission (LPC) is an independent public body that advises the Government on the rates of the National Minimum Wage (NMW), including the National Living Wage (NLW). Our remit from the Government is summarised below.
We are a social partnership body, usually made up of nine Commissioners representing employers, workers and independent experts. Every year since 1998, Commissioners have unanimously agreed the LPC’s recommendations to the Government.
This year is the first time in the Low Pay Commission’s history that we did not have a full complement of nine Commissioners. We have been reduced to two worker representatives rather than three since the beginning of 2023, but the Government has been unable to agree an appointment to fill this position. We urge the Government to avoid this happening again.
We met in October 2023 to agree recommendations for April 2024. We submitted our advice to the Government on 20 October. Our recommendations, and the content of this report, draw on evidence which was available up to that date.
This short report summarises the evidence underpinning our advice. It should be read in conjunction with our letter to the Government. All sources and references for charts and data can be found at the end. Our full 2023 Report, which sets out our evidence base in comprehensive detail, will be laid before Parliament and published early next year.
Our recommendations on the NLW and NMW rates were accepted in full by the Government and will come into effect from 1 April 2024.
The NLW and NMW rates effective from April 2024 are shown below.
Rates to apply from 1 April 2024
NMW rate | Annual increase (£) | Annual increase (per cent) | |
National Living Wage (for those aged 21 and over) | £11.44 | 1.02 | 9.8 |
21-22 Year Old Rate | See NLW | 1.26 | 12.4 |
18-20 Year Old Rate | £8.60 | 1.11 | 14.8 |
16-17 Year Old Rate | £6.40 | 1.12 | 21.2 |
Apprentice Rate | £6.40 | 1.12 | 21.2 |
Accommodation Offset | £9.99 | 0.89 | 9.8 |
Full source notes for all charts in this report are available in the data tables published alongside the report.
2. Our remit for 2023
Our remit is set and published each year by the Government and summarised below
The National Living Wage
The Low Pay Commission was asked to monitor and evaluate the National Living Wage and recommend the rate which should apply from April 2024 in order to reach two-thirds of median earnings (of those eligible for the National Living Wage) by 2024, taking economic conditions into account. Government remains committed to lowering the age threshold for the National Living Wage to aged 21 and over by 2024.
Other National Minimum Wage rates
For other rates, we were asked to recommend rates as high as possible without damaging the employment prospects of each group.
Groups of workers and geographical impacts
In addition to our standard remit on rates of the minimum wage, we were asked to pay special attention to two areas:
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Groups of low-paid workers with protected characteristics.
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The differing impact across the UK of increases in the NLW and NMW.
The future of the National Living Wage
Because this year’s recommendation takes us to the target for 2024, Government issued a second remit asking for evidence to inform future minimum wage policy, beyond 2024. We will submit this advice by the end of 2023.
Our evidence base and approach
To arrive at our recommendations, we consider a wide range of evidence.
This year’s recommendations have been informed by:
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A written public consultation exercise, held from March to June.
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A UK-wide programme of visits and meetings.
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Oral evidence sessions with 26 organisations representing workers and employers, as well as workers and employers themselves.
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A range of independent research projects.
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Comprehensive analysis of a range of economic and labour market data.
3. The path of the National Living Wage
Our remit is to recommend a rate of the NLW that will reach two-thirds of median hourly pay (for those aged 21 and over) by October 2024.
Predicting this rate is difficult. The target is a percentage of median hourly pay in the future, so hitting it requires us to predict this future. Our approach relies on forecasts, which are inherently uncertain. The methodology is explained in detail in a report published in March 2023.
Over the last year, nominal pay growth and forecasts of future pay growth have strengthened, increasing our projection of the NLW needed to hit the target. On the next page we explain these factors in more detail.
But it’s important to remember that the LPC’s recommendations are not purely formulaic. Predicting the rate is difficult and uncertain, and navigating this requires judgement. But Commissioners’ recommendations also need to work for the economy and labour market. This too requires judgement.
We expect our recommendation of £11.44 to meet the Government’s target of two-thirds of median earnings for those aged 21 and over by 2024.
We have also recommended significant increases to the minimum wage rates for apprentices, 16-17 year olds and 18-20 year olds.
In the rest of this report, we set out the evidence that influenced our recommendations for all the rates. It should be read alongside our recommendations letter.
Figure 1: Projected path for the National Living Wage to reach two-thirds of median earnings in 2024, 2020-2024
4. Strong pay data and forecasts increased our estimate of the NLW needed to hit the target
In the spring we expected the rate of the NLW needed to hit the target in 2024 to be £11.16, but within a range of £10.90 to £11.43. Our recommendation of £11.44 falls just outside this range and here we explain the upward pressures.
Since the spring, both measured pay and forecasts of pay have driven our estimate of the rate needed to hit the target upwards. The Annual Survey of Hours and Earnings (ASHE) showed median hourly pay grew more than anticipated in the year to April 2023 (Figure 2 below).
Then, measures of weekly pay continued to strengthen over the summer (Figure 3). While some of this was driven by one-off factors, such as lump sum payments and bonuses, underlying pay growth strengthened too. Though HMRC’s more timely wage data shows slightly weaker growth than the official headline data (see section below).
Finally, Figure 4 below shows how forecasts for wage growth in 2023 (dark blue line) and 2024 (purple line) have evolved over the last 18 months. Forecast wage growth in 2023 has increased steadily since April 2022 but jumped up sharply in September 2023.
This combination of higher than expected wage growth and forecasts themselves also rising put upward pressure on the rate needed to hit the target.
Figure 2: Projected and actual wage growth between April 2022 and April 2023
Figure 3: Year-on-year wage growth, AWE, August 2015-2023
Figure 4: Changing forecasts for average wage growth in 2023 and 2024
5. Economic growth has slowed and is expected to remain weak
Recent revisions to GDP data show the UK economy recovered from the pandemic faster than previously thought. However, growth has slowed substantially since then. The level of monthly GDP has barely changed in a year.
The recovery of GDP per head has been even weaker and is only fractionally above its pre-crisis level.
International comparisons show that the UK suffered the worst recession among G7 countries and has only recovered faster than Germany.
The outlook will depend on the persistence of inflation and its impact on real wage growth and incomes. Monetary policy has tightened with increases in interest rates squeezing both households and firms. But a boost can be expected from falling energy prices and reduced inflationary pressure more generally. However, recent tragic geopolitical events have increased uncertainty and fuel prices have risen again.
Overall, the UK is forecast to grow at around 0.5 per cent in both 2023 and 2024. This is lower than pre-pandemic growth and far lower than the 2.5-3 per cent norm before the financial crisis. The UK is expected to have some of the weakest growth in the G7 in the next year or so.
Figure 5: Annual growth in GDP outturn and HMT panel forecast, 2000-2024
Figure 6: International comparisons of actual and forecast GDP growth, 2019-2024
6. SMEs and those in low-paying industries are more concerned by costs and debt than other firms
Small and medium-sized enterprises (SMEs) make up 99 per cent of the 1.4m employers in the UK, with the smallest micro firms comprising 80 per cent. SMEs are responsible for over half of all employment.
Despite some easing of business concerns across the last twelve months there are variations by type of firm. The ONS’ Business Insights and Conditions Survey (BICS) shows small and micro firms are less confident about meeting their debt obligations. This share remained consistent and higher than larger firms across 2023.
Rising prices for both goods bought and sold remain a concern for firms. We continue to see more firms in low-paying sectors reporting increases in their input prices than in non-low paying sectors. And, while not all firms pass on these costs in their output prices, it remains more common for low-paying sector firms to do so.
Some firms are considering raising prices due to energy and labour costs. While the share citing these costs has fallen in the past year, one in three firms in low-paying sectors still say energy costs are driving their prices, compared with just one in five other firms. Labour costs are also a factor for more firms in low-paying sectors.
Figure 7: Share of firms with low or no confidence of meeting debt obligations by firm size, 2021-2023
Figure 8: Factors affecting firms raising prices, 2022-2023
7. Falling inflation will mean the NLW more than recovers any lost real value next year
Inflation appears to have peaked in late 2022. The Bank of England and the HM Treasury panel of independent forecasts now expect it to ease further over the rest of 2023 and 2024.
As a result, we expect the 2024 NLW rate (£11.44) to be a large real-terms increase on the 2023 rate (£10.42).
The Bank of England expect prices to grow by 3.3 per cent between the second quarters of 2023 and 2024. In this same period, the NLW will increase by 9.9 per cent. If the Bank’s inflation forecast is correct, the NLW will rise by 6.3 per cent in real terms in 2024 .
If inflation is more persistent than expected, the real terms increase will be smaller. However, inflation would have to be much higher than expected (9.9 percent or above) for the planned NLW rise to be a real terms decrease.
Figure 10 shows the real value of the NLW in 2023 prices. It shows that between 2021 and 2023 the real value of the NLW fell as inflation outstripped the rises in the NLW. However, the dotted orange line projects the real value of the NLW in 2024 (based on Bank of England inflation forecasts). It shows that the NLW will reach a new peak next year and more than recover the real value lost over the cost-of-living crisis.
The 2024 rate will be the highest value in real terms that the NMW/NLW has ever reached.
Figure 9: CPI inflation outturn and forecasts, 2020-2026
Figure 10: Real terms value of the adult National Minimum Wage/National Living Wage, 2014-2024
8. The LFS is likely understating the labour market’s current performance
The Labour Force Survey (LFS) is the source for the ONS’s headline measures of employment, unemployment and inactivity. So it is of critical importance to policy makers and organisations like ourselves.
However, over the pandemic, the LFS estimate of the number of employees diverged from the ONS’ Employee Jobs series and HMRC’s PAYE RTI data (see Figure 11). We discuss below how this is particularly apparent in low-paying industries.
This is likely connected to LFS population weights interacting with falling sample response rates (face to face interviews were stopped in the pandemic) and causing more problems than in the past.
In practice, this means the data is subject to greater variability and calls into question the reliability of the headline measures. It also makes it much harder to analyse specific groups of workers, as discussed later in the report.
It appears the LFS is understating the labour market’s current performance. Employment growth is higher on other measures, albeit plateauing on the RTI measure. The LFS weighting also feeds into the Annual Survey of Hours and Earnings (ASHE). If LFS is increasingly undercounting the low-paid, this may cast doubt on the accuracy of the ASHE coverage figures.
Figure 11: Growth in LFS employees, Employee jobs and RTI, Aug 2017-Aug 2023
9. Despite falling vacancies, demand is resilient, and shortages remain
While the LFS may be understating the labour market’s current performance, the gradual softening in the demand for labour is clear. The number of job vacancies reported by the ONS has fallen month-on-month from a high of 1.3m in May 2022 to just under 1m in September 2023. These levels nevertheless remain higher than pre-pandemic.
Alternative sources of job vacancies from Adzuna and Indeed tell a similar story. They have softened throughout 2023, but levels are holding up in recent data.
Alongside this, there has been a slight fall in the share of firms in low-paying sectors reporting staff shortages. With fewer vacancies overall, employers may find the market less competitive and so easier to recruit from.
However, despite this fall, worker shortages in low-paying sectors remain above those for other sectors. While worker shortages in hospitality and health and social work have fallen sharply from their peak, the share of firms in these sectors reporting shortages remains substantial.
Overall, demand for labour is softening but remains above pre-pandemic levels, with many low-paying employers struggling to recruit. This suggests demand, while softening, is resilient.
Figure 12: Net change in vacancies since Feb 2020
Figure 13: Proportion of firms reporting worker shortages, Oct 2021-Jul 2023
Figure 14: Proportion of firms with worker shortages by sector, Nov 2021-Oct 2023
10. Inflation and the tight labour market have driven up pay, but these forces are now softening
The combination of resilience in the labour market and inflation has led to strong growth in nominal wages.
Employers note that inflation was the main driver for their pay settlements in 2023. Shortages and competition from other employers were also significant drivers. The NMW/NLW was a factor for just over a third of employers.
The share of firms expecting these factors to drive settlements in 2024 has declined. As a result, fewer than 10 per cent of firms expect settlements at 7 per cent or above in 2024. In 2023 around 40 per cent of employers made awards of this size.
As pay pressures diminish, the Bank of England and the HMT panel forecast annual pay growth below 4 per cent by the end of 2024. The RTI median of pay growth measure, which removes compositional effects, already shows annual pay growth falling rapidly in recent months.
Figure 15: Average weekly earnings (AWE) Total pay growth, median of monthly pay growth, and forecasts of AWE Total pay growth, 2015-2024
Figure 16: Balance of pressures on pay settlements, XpertHR, 2022-2024
11. Fewer jobs paying the NLW and more workers escaping the wage floor suggest a tight low-paid labour market
As the NLW moves up the pay scale we expect coverage (the number of jobs paid at or below the rate) to rise. Instead, it fell for the second year in a row. In April 2023 4.9 per cent of jobs were covered, a slight decrease on 2022 (5.1 per cent) and well below 2019 (6.6 per cent). This suggests that other factors are also driving up pay at the bottom of the distribution. This includes the worker shortages and inflation discussed on the previous two pages.
The shares of workers paid up to 50 pence or £1 above the minimum wage are also lower now (11.0 and 17.2 per cent respectively) than in 2019 (12.4 and 18.4 per cent).
Workers are more likely to progress off the minimum wage into higher pay than pre-pandemic. In 2023, 50 per cent of NLW workers who remained employees progressed off the NLW – a significant increase from the 40 per cent average between 2016 and 2018. The share progressing to be paid £1 or more above it has also increased from 15 to 20 per cent between 2018-19 and 2022-23. Firms seem willing to offer pay above the minimum wage to attract workers.
Employers worry that a rising minimum wage reduces pay differentials within firms and workers’ incentive to progress. While we do see some evidence of shrinking differentials, the data suggest workers are finding it easier to move off the wage floor. Workers may be using opportunities in other firms and industries to progress, despite falling differentials.
Figure 17: Per cent (LHS) and number (RHS) of jobs paid at or below adult NMW/NLW, UK, 2013-2023
Figure 18: Per cent of adult NMW/NLW workers escaping the NLW in following year, UK, 2013-2023, (only includes workers employed for two consecutive years)
12. Employers are concerned about cutting pay differentials any further
Many employers tell us it’s difficult to keep pay differences fair as the NLW rises. When the NLW rises it puts pressure on the pay of jobs higher up the pay scale, otherwise differentials fall. Firms worry that lower differentials reduce motivation, retention and progression for their staff.
We have tracked industry-level differentials within various low-paying industries since 2015. We found that the difference between the median and 10th percentile of pay fell dramatically within all low-paying industries between 2015 and 2019. For most industries, they also fell between 2019 and 2022.
However, between 2022 and 2023 industry-level differentials stabilised. It is possible firms cannot reduce differentials further without affecting recruitment and retention. If firms choose to maintain differentials, it makes absorbing NLW rises more costly.
Figure 19: Percentage difference in pay between the 50th percentile job and the 10th percentile job, by low-paying industry, UK, 2015-2023
13. Jobs in low-paying sectors have grown more than the LFS suggests, but less than other sectors
We earlier showed that the LFS is likely to be understating the number of jobs in the economy. This is more apparent in the low-paying industries where most minimum wage jobs are found. Between 2019 and 2023 the number of low-paying industry employees in the LFS dropped 8.8 per cent, but grew by 2 per cent in the Employee jobs series.
A stark example is hospitality. On firm surveys and HMRC’s payroll data, employment is well above pre-pandemic levels (11 per cent and 5 per cent respectively). In the LFS, however, there are 10 per cent fewer employees than pre-pandemic.
However, on any measure, the number of low-paying industry employees has grown more slowly than other industries since 2019 (2.0 per cent compared with 7.7 per cent using Employee Jobs).
While the minimum wage could be a cause of this relative decline, other factors are likely playing a more important role. We’ve already shown that minimum wage workers are now more likely to progress onto higher pay. It’s possible that these moves are to non-low paying industries. We’ve also shown that low-paying employers are finding it more difficult to recruit than other sectors. If one industry struggles to recruit and retain because of competition with another, we would expect employment to grow more slowly there.
There are also longer-term factors. These include the shift away from high street retail, changes to the migration system and the pandemic changing employment patterns. We will explore these further in our full annual report to be published in early 2024.
Figure 20: Percentage growth in employees/employee jobs, by low-paying industries (broad definition), UK, 2019 Q2-2023 Q2
Figure 21: Employee levels in Hospitality (Accommodation and Food), UK, 2015-2023
14. Employers continue to absorb the rising NLW via profits or prices
Since the NLW was first introduced, the most common employer responses have been to absorb the increases via reduced profits or, where possible, to pass them onto consumers through higher prices. Cutting employment has been much less commonly reported – and is more often done via reduced hiring rather than redundancies.
This remained the case in 2023 – although the frequency of reported price pass-through has risen markedly in the past two years. This has come in the context of broad-based increases in businesses’ costs (driven particularly by energy) and rising inflation making it easier to pass costs through. Our assessment is that even if firms passed on 100 per cent of the cost of NLW increases – an improbable scenario – this would have a very small impact on overall inflation (increasing it by up to 0.3 percentage points).
More employers this year told us they were worried they were reaching a limit in what they could pass through without undermining demand. And there remain large low-paying sectors – social care and childcare in particular – where employers’ ability to pass on increased costs is highly constrained.
Figure 22: Surveyed responses to NLW increases, Federation of Small Businesses (left), Confederation of British Industry (centre), Chartered Institute of Personnel and Development (right)
15. Despite the rising NLW, low-paid workers continue to face challenges in the workplace
From workers and their representatives we heard that the rising minimum wage had not been enough to avoid growing hardship. We heard accounts of food bank usage and evidence on rising indebtedness, as targeted support introduced last year began to fall away.
I’ve had [colleagues] crying on the phone to me, that they can’t feed their children. I’ve actually taken food out of my own cupboards and taken it round.
Care worker, Oldham
Workers in low-paying industries continued to struggle to secure sufficient regular hours; for many, the unpredictability of their working time exacerbated their financial challenges.
Low-paid workers in the labour market
[Employers] don’t have a recruitment problem, they have a terms and conditions problem.
Usdaw official
A range of other barriers hold back low-paid workers in the labour market. These include the direct and indirect costs of getting a new job; the expense and limited availability of transport; and childcare costs, which remain prohibitively high for many parents and force them to choose between working or caring for their children.
Uncertainty over hours and the paucity of full-time roles also exacerbate recruitment problems. As one retail worker told us: “When you’re applying for a job, I literally scroll through to see how many hours I can get and the most hours at the moment is like 30 hours at the most … it’s normally between 16 and 24, 25 hours.”
Quality of work
They are just trying to get more for less. …what they require from us is nothing like it was pre-Covid where there was a lot more staff available.
Hospitality worker, Birmingham.
Workers across a range of sectors felt more was being expected of them in their jobs and they were being given additional pressures at work.
Low-paid workers in customer-facing roles again told us they received more abuse in the workplace as they grapple with more incidents of unruly customers due to cuts in security budgets.
I’ve been hit on the head, I’ve been threatened to be stabbed … it’s just constant and [the employers] do nothing about it.
Retail worker, Belfast
Progression and training
We heard evidence that opportunities for progression and training for low-paid workers were limited. As Unite told us: “It remains the case that employees in the accommodation sector barely earn more in their thirties and forties than they do in their twenties.” One Unite official in hospitality commented on the feeling among many low-paid workers that “this is their ‘lot’ so to speak, no chance of progression or development will keep them at this level throughout life.”
16. Pay has grown strongly for young workers, but youth rates have lagged behind the NLW
Young workers have continued to see robust growth in their median hourly pay into 2023, with 18-20 year olds’ growing the most. Even with 2023’s large increases in the youth minimum wage rates, young people’s median pay has risen faster than minimum wages since 2016. This means the bite of the youth rates (their value relative to the median) fell over the same period.
Over the last decade or so, the gap between adult and youth minimum wages has widened in both percentage and cash terms. Several stakeholders – some employers as well as unions and youth groups – argued this gap had become too large. Our recommended rates for 2024 will go some way to closing the gap.
Use of the youth rates remains below pre-pandemic levels. We continued to hear from some employers that higher pay was needed to attract young workers in a competitive labour market. Coverage has fallen particularly sharply in low-paying industries, where firms are more likely to report worker shortages.
We have already noted our concerns about the Labour Force Survey. However, the available data taken together suggest a continued very strong employment picture for 16-17 year olds and a more moderate but still healthy recovery for 18-20 year olds. This, combined with strong pay growth and falling use of the minimum wage led us to recommend significant increases to the minimum wage rates for apprentices, 16-17 year olds and 18-20 year olds.
Growth in median and minimum wages, 2016-2023
Growth in median pay, 2022-2023 (per cent) | Growth in median pay, 2016-2023 (per cent) | Growth in the minimum wage, 2016-2023 (per cent) | |
16-17 | 6.7 | 47.3 | 36.4 |
18-20 | 9.2 | 47.3 | 41.3 |
21-22 | 8.7 | 43.2 | 51.9 |
23+ | 7.3 | 29.8 | 44.7 (NLW) |
Source: ASHE and LPC data. Excludes those eligible for the apprentice rate.
Figure 23: Youth minimum wages relative to the adult rate, 2011-2023
Figure 24: Coverage rate by industry group, 16-20 year olds, 2016-2023
17. 21-22 year olds will be entitled to the NLW from April 2024
As part of meeting the target, all workers aged 21 and over will be entitled to the NLW (£11.44) from April 2024. This means an increase of 12.4 per cent or £1.26 per hour for 21 and 22 year olds paid at the minimum.
While this is a large increase, stakeholders continue to tell us they support the move and we have prepared for it with recent increases bringing the two rates closer together. Evidence has also shown that 23 and 24 year olds continue to do well since moving to the NLW in 2021.
The majority of 21-22 year olds are already paid at the NLW or above, with only around one in ten covered by the current 21-22 Year Old Rate.
We are currently reviewing the broader framework for minimum wages to inform the Government’s decisions after 2024. Our current thinking is that we should move towards an adult rate that begins at age 18, but we will have more to say about how we might approach this and the associated evidence base in our forthcoming advice to Government on the post-2024 minimum wage framework.
Figure 25: Changes in the adult and 21-22 year old rates of the minimum wage, 2015-2024
Figure 26: Coverage of age-related minimum wage and NLW, 21-22 year olds, 2019 and 2023
18. Apprenticeship starts remain stable, while use of the Apprentice Rate has fallen
We have not seen a major change to numbers of apprenticeship starts in the past year. We continue to see a shift away from the lower level courses most likely to be paid the Apprentice Rate towards higher level courses.
In England, this shift has been driven by policy reforms; the majority of the evidence we hear suggests pay and the NMW are not primary causes.
Coverage of the Apprentice Rate fell overall in 2023 compared with 2022. This is likely to be partly due to continued changes in the level and age of apprentices. However, we have also heard that some employers have struggled to recruit to the lowest-paying apprentice roles in the context of rising wages for young people more generally.
Although coverage has fallen, it remains higher than for other NMW rates. We also estimate that between 30 and 40 per cent of apprentices aged 18-22 are currently paid below the age-related NMW they would be entitled to if not an apprentice.
Many stakeholders continue to tell us that the Apprentice Rate is too low. Both employer and worker representatives told us it discourages young people from choosing apprenticeships. Despite this, there remain sectors where the rate is widely used, or where employers value the flexibility it enables.
There was widespread support for removing the Apprentice Rate. We will say more on this in forthcoming advice, once we have considered new evidence from DfE’s Apprenticeship Evaluation Survey and our own commissioned research.
For now, we recommend keeping the Apprentice Rate aligned with the 16-17 Year Old Rate from April 2024. The large increase we have recommended will go some way to reducing the gap with the NLW while maintaining a reduced rate for those employers who need it.