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Watchdog attacks Tory and Labour minimum wage proposals

Phillip Inman
Photograph: Murdo MacLeod/The Guardian

Labour’s plans to increase the minimum wage to £10 an hour for all workers on its first day in office will treble the number of people covered by the pay policy and largely miss the target of raising the incomes of poor households, according to a study by the Institute for Fiscal Studies.

The tax and spending watchdog said a Tory proposal to increase wages at a slower pace would only double the number of people protected by the minimum wage by 2024 and also largely benefit those in better-off households.

In a scathing review of the parties’ proposals to reduce in-work poverty, the IFS said less than one in five of the people who would benefit from a higher minimum wage lived in low-income households. “The direct benefits from minimum wage increases would mostly go to middle-income households,” the report says.

Only 17% of minimum-wage workers live in the poorest fifth of households and just 19% are in households in relative income poverty, after a shift to part-time work that often means low-paid workers live with higher earners, it says.

Those workers who are on the minimum wage and live in the poorest households would lose much of the gains under Tory and Labour plans without reforms to universal credit making it more generous.

“Many of those who do live in low-income households would see part of their gains clawed back through reduced benefit entitlements,” the report says.

Sajid Javid has proposed to increase the national living wage, which covers workers aged 25 and over, from £8.21 to £10.50, raising the low-pay floor from 60% to two-thirds of median earnings. Javid said the living wage would be extended to 21-year-olds over the duration of the parliament.

The IFS said this would bring one in six employees within its scope, adding 2.5 million to the current 1.9 million covered by the living wage.

Labour’s plans to introduce a £10 minimum for those aged 16 and over would mean more than a quarter of all employees’ wages being directly set by the minimum, with an additional 4.6 million employees aged 21 and over directly affected, taking the total to 6.5 million.

Private sector workers would be more affected by Labour’s policy, which would mean almost 30% of private sector employees’ wages being set directly from Whitehall, while Conservative policy would set 20% of private sector wages.

Xiaowei Xu, a research economist at the IFS and an author of the report, said: “The Conservatives and Labour’s plans would take us into uncharted waters. That calls for a careful and incremental process to ensure that, if the employment prospects of the low-paid do start to be impacted, policymakers can change course before it is too late.

“We should not be setting minimum wages via a political bidding war. If due consideration is not given to the balancing act involved, the risks to the very people the policy is intended to help may be quite severe.”