Who does a National Minimum Wage increase really benefit?

The national living wage is to rise by 6.2% in what the government says is "the biggest cash increase ever".

The rise is more than four times the rate of inflation and takes hourly pay for people over 25 to ￡8.72 from April.

This is great news,……for some!

The National Housing Federation, an organisation that represents housing associations, says that England needs 145,000 new ‘social homes’ to be built every year of which 90,000 need to be available at below market rent.

In 2018 the government spent ￡1.27bn on social housing but the NHF say that needs to increase to ￡12.8bn a year for the next 10 years to meet demand.

So, demand for social and affordable housing is massively outstripping supply and it’s the people that need this type of housing that are typically earning the NMW.

So what happens when the NMW increases? Well, those that couldn’t previously find an affordable home can now scrape enough together to compete for a place that they previously couldn't afford – but then, so can all of those that they are competing against. As a consequence, rents increase. 

In reality, while the supply of affordable homes is outstripped by supply and, in the absence of rent controls or subsidy, all of the additional income is absorbed by the increased cost of housing. The outcome is a win/win/no change. The landlords win because they can demand more rent, the government wins because they can headline a big increase in the NMW, but the minimum wage earners are in reality no better off at all. Their non-accommodation disposable income remains just the same. In fact, in the long run they’re going to be worse off as everything they buy will to go up in price as suppliers need to cover their own increased labour costs.

If you asked people whether they would prefer a 6% cut in their housing costs or a 6% increase in their pay they should opt for the former every time. Doesn’t sound as good though.