The chancellor announced a compulsory national living wage for over-25s from next year that will rise to £9 an hour by 2020. What does it really mean?

Can living wage campaigners pack up and go home?

No. Even once it has risen to £9 an hour by 2020, Osborne’s new national living wage will be below the level of the London living wage today. The living wage is set annually, and calculated as the amount a full-time worker needs to afford a decent standard of living. It is currently set at £9.15 in London, £7.85 in the rest of the country.

More importantly, the sharp cuts in tax credits and other in-work payments Osborne announced as part of his plans to save £12bn from the welfare bill are likely to cut families’ incomes. So the living wage – as opposed to Osborne’s new NLW – is itself likely to have to rise to offset benefit cuts.

Alison Garnham, chief executive of the Child Poverty Action Group, described the move as a “higher minimum wage” rather than a true living wage.

So what is George Osborne’s new payment?

The rabbit in the hat in the final moments of the chancellor’s budget was a new wage floor of £7.20 an hour for the over-25s, rising to £9 by 2020, which he called a national living wage.

He was seizing on the language of the living wage campaign, which began as a rag-tag assortment of charities and churches in east London, but has gained national recognition.

He also cited a commission produced for the Resolution Foundation thinktank, which called for a minimum wage with a higher biting-point — in other words, one that lifts the wage floor closer to the level of average earnings.

Will this replace the national minimum wage?

Not quite. The minimum wage, introduced by Labour in 1997 in the teeth of opposition from the Conservatives, will still be paid to 18- to 24-year-olds, with under-21s receiving the youth rate.

In total, the Office for Budget Responsibility reckons that a total of 6 million earners will see their pay boosted as a result of the policy. That includes current minimum-wage earners, and those who earn more than the minimum wage but less than the new rate.

Looking at how much households will gain, the OBR says “around half the cash gains in household income may accrue to the top half of the household income distribution”, because low earners are often the second earner in a family.



Photograph: OBR

How will the new national living wage be set?

Osborne will ask the low pay commission – the independent panel that sets the minimum wage – to work towards lifting the new pay floor to 60% of median earnings.

The OBR reckons that by 2020 pay for the the group that receives the new NLW will be 13% higher than it would otherwise have been.