The Institute for Fiscal Studies (IFS) has found that large increases in the minimum wage have led to higher incomes for low earners, but cuts in tax credits have more than offset these gains.
According to the IFS, the UK has suffered from a chronic lack of real wage growth since the 2008 financial crisis. Due to inequalities in the labour market, wage growth for middle and low earners in non-traditional employment needs to be boosted.
Many of the lowest-paid workers were protected by the minimum wage. Between 2011 and 2019, low-earner wages rose twice as fast as average earnings.
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But poorer households are at risk of poverty, because a quarter of the bottom fifth of the highest earners are now self-employed and therefore no longer qualify for the minimum wage.
But even those working for the minimum wage may now be worse off due to the cut in tax credits.
“Since 2011, low-income households’ incomes have increased faster than they did between 1994 and 2011. However, their income growth has slowed as welfare benefits and tax credits have been cut,” the report said.
Robert Joyce, deputy director of the IFS, said: “Many people on modest incomes have seen their incomes hold up better than we would have expected. This is because of two policies that have essentially increased their incomes by brute force: first (mainly) tax credits, and then (mainly) higher minimum wages.
“This policy has achieved much of what it wanted to achieve. But it cannot bear the responsibility alone forever.”
The IFS found that over the past 40 years, the UK has experienced a period of rising income inequality that was much greater than in most developed countries until the global financial crisis. If you compare the age group of those born in the 1980s, the median income is no higher than that of those born in the 1960s.
Stephen Machin, professor of economics and director of the Centre for Economic Performance at the LSE, said: “Higher income inequality, low real income growth and a very different labour market from 40 years ago have led to a much more unequal situation in the world of work.”
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“To halt or reverse this trend, we need to pay significant attention to ways to restore and boost real income growth and create decent jobs with good career prospects in an inclusive manner.”
According to IFS, the lack of tools to increase yields remains a problem.
Mark Franks, social director of the Nuffield Foundation, said: “Measures such as the minimum wage and tax credits have helped many low earners, but they are not enough to fully protect all low earners, including the growing number of self-employed.”
“Combined with sluggish wage growth and factors such as rising prices and a lack of permanent housing, this has left many individuals and families in a precarious position.”
The minimum wage now directly applies to two million people, or seven percent of all dependent jobs. In 2015, before the introduction of the current national living wage, the figure was 1.5 million.
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