Does London need its own (higher) Minimum Wage?

There is no legislative basis for the introduction of a statutory minimum wage for London, yet the very different nature of the London economy combined with the fact that the low paid in London are paid more than elsewhere prompts the question as to whether the London economy could sustain a higher minimum wage without damaging competitiveness and jobs.

It is possible to ask this question without in any way distracting from the important living wage campaign. The London living wage is voluntary, based on the costs of living in London, and should be adopted by any employer that can afford to do so. The national minimum wage is a statutory wage floor designed to eliminate exploitation amongst the lowest paid, and is set independently by the Low Pay Commission (LPC) to take account of wider economic effects.

The Centre for London think-tank, which is independent and cross-party, supported by the Trust for London has posed the question of what level the LPC might set for a London minimum wage if they had the legal mandate to do so. The results, published today, show that replicating LPC methodology gives an estimate of £6.75 for a minimum wage for London if it were introduced now, 7% higher than the current national minimum wage of £6.31.

This London rate is the economic equivalent to the national minimum wage and affects the low pay sectors in London in the same way as those sectors outside London are already impacted by the national minimum wage. If introduced it would increase the employment income of around £175,000 London workers to the tune of up to £800 a year, with annual savings to taxpayers of around £62m. And because it is economically equivalent to the national minimum wage, which has been introduced without negative employment effects across the wider economy, it is reasonable to think London employers could also accommodate the rise, providing of course it were introduced with plenty of notice.

Moreover our research shows that in time it may be possible to have a minimum wage for London that is around 20 per cent higher than the national minimum wage: this was the differential between London low pay and UK low pay when the LPC did its first analysis in 1997. Since then, the differential has narrowed because low pay in the rest of the country has been lifted by the national minimum wage whereas that in London has barely been affected. If the LPC had recommended a London minimum wage from the start it may well, therefore, have recommended that it be 20 per cent higher than the national minimum wage, which in today’s prices would give a London minimum wage of £7.57 raising the employment income £315,000 Londoners by up to £2,300 annually and saving the taxpayer £280m each year.

We therefore recommend that the National Minimum Wage Act 1998 be amended to require the LPC to advise on an appropriate rate for London, with democratic accountability resting with the Mayor. This has the potential to increase the employment income of the lowest paid without adverse effects on the London economy.

Kitty Ussher is an economist and former Treasury minister. Her pamphlet London Rising: The case for a London Minimum Wage is published by Centre for London and Trust for London.