Chancellor George Osborne has said he will introduce a compulsory "national living wage" for people aged over 25 as part of his July Budget.
Osborne said today that the new "national living wage" will start next April at the rate of £7.20 per hour, before rising to £9 an hour by 2020.
He said it means 2.5m people will get a direct pay rise, while six million people will see their pay increase as a consequence of the policy.
The national minimum wage currently stands at £6.50 per hour, and is set to rise to £6.70 in October. However, the voluntary living wage is £7.85 per hour outside of London, and £9.15 inside the capital.
Business groups' reaction mixed
Some business groups today welcomed the announcement, saying a pay rise for Britain was long overdue.
"We should not understate the boldness of this move, and many businesses will have been taken by surprise, but the Institute of Directors accepts that after several years of slow wage rises, now is the time for companies to increase pay," Simon Walker, Director General of the Institute of Directors, said.
Others said introducing a compulsory national living wage was a "gamble" because it doesn't necessarily reflect the ability of businesses to pay it.
"The CBI supports a higher skilled, higher wage economy, but legislating for a living wage does not reflect businesses’ ability to pay. This is taking a big gamble that the labour market can absorb year-on-year increases of an average of 6 per cent," John Cridland, CBI Director-General, said
But think tanks were critical
Nevertheless think tanks questioned whether Osborne's promises were really as good as they seemed.
"Without a change of remit for the Low Pay Commission, this is effectively a higher national minimum wage and not a living wage," Rhys Moore, director of the Living Wage Foundation, said.
OBR says impact on employment "fractional"
The OBR estimates that the national living wage will have a "fractional" effect on employment – while there will be 60,000 fewer jobs by 2020, it will create almost one million more.
"[The OBR] estimate that the cost to business will amount to just one per cent of corporate profits. To offset that I have cut corporation tax to 18 per cent," Osborne said.
"To help small firms I will go further now and cut their national insurance contributions."
"From 2016 our new Employment Allowance, will now be increased by 50 per cent to £3,000."
"That means a firm will be able to employ four people full time on the new national living wage and pay no national insurance at all."
He's also responding to political manoeuvring from his main rival for the Conservative leadership, Boris Johnson, who recently used his column in the Daily Telegraph to argue the government should make some of Britain's biggest companies pay the living wage.
Osborne wants business to pay higher wages, in exchange for lower taxes
The new "national living wage" is compulsory for employees aged over 25
It'll start next April at the rate of £7.20 per hour, rising to £9 an hour by 2020