Rising UK minimum wage helps reduce income inequality

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UK income inequality has narrowed since the pandemic as a rising minimum wage and a surge in hiring boosted earnings for some of the lowest-paid employees, according to data released on Wednesday.

The proportion of employees paid below two-thirds of the UK’s median hourly rate stood at a record low of 8.9 per cent in April 2023, down from 10.7 per cent in 2022 and 16.2 per cent in 2019, the Office for National Statistics said.

At the same time, the proportion of employees on high pay — defined as more than one and a half times the median hourly rate — fell to 23.4 per cent, compared with 25.4 per cent in 2019.

“Britain has a bulging middle as the share of both high and low-paid employees continues to decline,” said Nye Cominetti, senior economist at the Resolution Foundation think-tank, adding that the drivers were government policy on the minimum wage and tax breaks for high earners who switched to self-employment.

The decline in the share of workers on low pay reflects successive increases in the UK’s statutory wage floor, as the government pursues a target to raise the national living wage to two-thirds of the median by 2024.

Among full-time workers, employees in the bottom fifth of the pay distribution were the only ones whose pay rose faster than inflation in the year to April, even though the UK’s median wage rose by 7.7 per cent in nominal terms, the fastest pace in 25 years of records.

Workers in low-paid sectors have also benefited from intense competition for staff among employers struggling to hire, and efforts to tilt pay awards towards those most exposed to cost of living pressures.

The data shows a big cluster of jobs paid at or close to the statutory hourly minimum of £10.42, but a growing proportion of employees were paid an hourly rate close to £11 — matching the voluntary rate for 2022-23 set by the Living Wage Foundation, a charity that campaigns for fair pay.

For the first time, there was also a significant share of employees paid at the higher rate of close to £12 the Living Wage Foundation had encouraged employers to pay in London, to reflect the capital’s higher living costs.

Wage growth was strongest in low-paid occupations such as caring, leisure and other services; and in sales and customer services; with technicians and people working in skilled trades seeing some of the smallest increases.

The finding by the ONS that a dwindling share of employees have high hourly pay, relative to the median, is at odds with patterns seen in other data sources.

Cominetti said one “likely driver” of the trend was the fact that many high earners had shifted to self-employment to reduce their tax bills, with big tax savings possible for those who set up a limited company and take their pay in dividends.

Previous ONS publications, based on tax records and a monthly survey of businesses, have painted a different picture, with HM Revenue & Customs data showing that the highest pay growth since the pandemic has been in high-paid sectors such as finance and business services.  

Wednesday’s figures are far more detailed and are based on an annual survey completed by employers, covering 1 per cent of UK employee jobs.

The survey is usually considered the most authoritative source of pay data. But Xiaowei Xu, a researcher at the Institute for Fiscal Studies, said recent problems with data collection could be partly responsible for the narrowing earnings inequality evident in Wednesday’s figures.

The sample size for the survey had dropped by about a fifth since the pandemic, she noted, and small firms in particular — who were more likely to be low in the wage distribution — had stopped responding.