Criteria on increasing the National Living Wage target

This report aims to help the Government decide what should happen to the National Living Wage over the long term. The criteria to consider when making this decision are credibility with stakeholders, clarity of purpose, potential impacts of the minimum wage and supportive long and short-term economic and policy conditions.

Credibility with stakeholders and clarity of purpose

• Deciding what aims the minimum wage should achieve: the minimum wage has had a range of aims since it was introduced from preventing exploitation to lowering inequality and tackling in-work poverty. Before deciding what to do next the Government should decide what outcomes it wants the minimum wage to achieve and align other policies to that aim.
• NLW policy is most credible when both workers and employers understand and back its purpose: Workers and their representatives want to be assured that any new target will be achieved and that they will benefit from this. Employers want to be assured that economic and business conditions will be taken into account.
• Workers and their representatives back a further target: they believe it will make a material difference to living standards, with limited impacts on employment.
• Employers and their representatives are against further targets: They worry that the NLW is rising inexorably and unsustainably, potentially harming jobs, with no clear end point. They back a return to a qualitative remit without a target.

Potential impacts of the National Living Wage

• The NLW has been a success, but there are trade-offs: It has raised pay and living standards of low-paid workers. Between 2016 and 2025 the real weekly pay of NLW workers increased by more (20 per cent) than the median job (4 per cent), but without strong evidence of meaningful damage to employment. However, this does not mean that it has been easy for employers, that low-paid workers are no longer struggling or that there won’t be trade-offs or negative impacts in the future.
• We have modelled hundreds of scenarios to understand the potential impact of a higher target: We expect the impact on prices and employment to be small, but the risks increase with more ambitious targets or less time to reach them. Importantly, our estimates are uncertain: changing economic circumstances can change the effects of the NLW, and some sectors are more exposed than others.
• The UK has risen up the international rankings: When the NLW was introduced the UK was middle of the pack internationally (ranking 17th of 31 OECD countries in 2015). Other countries had higher minimum wages relative to average wages without causing harm - this was reassuring. But now we’ve moved near the top (ranking 7th of 31 OECD countries in 2024) there are fewer countries to learn from, diminishing the value of the international evidence base.

Supportive long and short term economic and policy conditions

• Responsiveness to economic conditions will remain key: Because it is not possible to be certain whether the economy can absorb a further target or the associated increases, what really matters is the Government’s risk appetite for job losses or other negative impacts. The policy will need to be able to respond to economic circumstances year by year and this will be key to its credibility.
• Economic conditions are very different to when the previous NLW targets were announced: In recent years unemployment has risen and vacancies have fallen below pre-pandemic levels, particularly in retail and hospitality. Setting a higher target now, when conditions are not strong, may lack credibility with employer stakeholders. Equally, worker representatives note that low-paid workers are still struggling with the cost of living.
• The minimum wage does not exist in a vacuum: If the Government has clear policy aims in mind it should decide how the NMW/NLW, along with other policies, can contribute. For example, ensuring the objectives of minimum wages and in-work financial support are complementary. Similarly, if the Government is concerned about the possible negative effects of minimum wages, it can consider other policy changes to mitigate these.