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National living wage: An election war-cry and a bold step into the unknown, writes Joel Hills

Sajid Javid announced an increase in the national living wage. Credit: PA

This is a bold step into the unknown.

The Chancellor Sajid Javid wants to make the national living wage more generous and lower the age at which it is paid.

Mr Javid wants the national living wage to reach two-thirds of median earnings (£10.50 per hour) over the next five years, a move that will affect one in four workers.

But the Chancellor is taking a risk here.

He’s forcing wages up for low paid workers because the market isn’t and there may be a good reasons why companies aren’t being more generous.

There is a cost to this decision and it’s borne by employers in the public and private sectors - they may pass it on.

The increase in wages will be paid for in the form of higher prices, lower profits or lower earnings elsewhere. It may also be paid for in jobs.

The recent increases to the minimum wage (let’s call the national living wage what it is) has been achieved without damaging employment, which is at record high levels.

But at some point it will and the question is where is the tipping-point?

Sajid Javid has taken his predecessor's idea and run with it, the previous chancellor, Philip Hammond, had the ambition of raising the minimum wage to two thirds of median earnings.

He asked Professor Arindrajit Dube to examine the matter.

The government has moved before the recommendations of the Dube Review have been published.

On Monday night Prof Dube confirmed he decided the Government could be more ambitious and recommended a range of 60%-66% of median earnings.

He also recommended that the Low Pay Commission - which is independent of Government - should "implement, evaluate, and recalibrate" the rate at which it is set.

Put another way, Sajid Javid has set a target that the Low Pay Commission may decide cannot be hit.

The national minimum wage league table. Credit: IFS

On Monday night Philip Hammond welcomed the announcement but questioned the wisdom of lowering the age at which the National Living Wage wage is paid.

Hammond said lowering it from 25 to 21 ”needs to be handled very carefully: it would be a tragedy is a well-intentioned policy turned out to deliver a rise in youth unemployment”.

He added: “such a radical move needs the backdrop of a vibrant, growing economy”.

Put another way: in the event of no deal and a downturn, this policy is going to be very hard to deliver.

The rise in minimum wage since 1999. Credit: IFS

In recent years the increases to the minimum wage have had less of an impact on living standards than perhaps you might think as it has coincided with government cuts to working age benefits but this announcement will undoubtedly benefit four million people in the UK who are on low incomes.

"We are the workers’s party," declared Mr Javid at conference.

You can see this policy sitting prominently in an election manifesto.

Labour will have to respond and with more than just criticism.

A political bidding war may have just begun.

Former chancellor Philip Hammond questioned the lowering of the age. Credit: PA