The Minimum Wage Illusion: Why a Pay Rise Alone Won’t Close Britain’s Growing Inequality

Despite repeated increases in the National Living Wage, soaring housing and living costs have largely swallowed workers’ gains, leaving the deeper structural issues unchanged.

As part of the government’s so-called ‘Plan to Make Work Pay’, the National Living Wage has been increased once again, with many viewing it as a powerful lever to combat poverty and raise living standards. However, despite being well-intentioned, it is not enough to simply make low-paid work pay better, as the root problems of exorbitant housing costs, limited productivity growth, and a long-standing wealth divide remain unsolved by a statutory wage floor. Furthermore, against the backdrop of vast inequality in income, where the highest-earning 20% of UK households took home roughly 37% of total disposable income, while the poorest 20% received just 8%, this approach is unlikely to secure genuine prosperity.

For over 25 years, the minimum wage has been a fixture of British employment policy, evolving from a modest wage floor introduced in 1999 at £3.60 an hour for adults aged 22 and over, to becoming one of the most aggressive statutory wage floors in the developed world. Despite critics in the late 1990s warning that a statutory minimum would destroy jobs, the economy continued to grow and employment did not collapse, with many firms absorbing the higher labour costs by marginally increasing prices, trimming profit margins, or finding productivity gains, rather than cutting staff. However, by 2016, the policy had been reimagined as a more ambitious project, with the goal of moving the legal wage floor closer to an actual living income rather than just an anti-exploitation tool. In the following years, successive governments have put forward robust annual increases, in line with a target equal to two-thirds of median hourly earnings, with the bottom end of the wage distribution moving closer to the median, effectively compressing the lower end of hourly pay. It is this change that many policy proponents deem to be a victory, as by elevating the bottom rung of earnings, families trapped in precarious earnings can now inch their way out of the poverty bracket.

However, one factor that has been hard to ignore over recent years is the acceleration of essential living costs, with many of these fundamental areas of expenditure significantly outpacing increases in the NLW and eroding much of the benefit from higher hourly pay. Rent has surged, rising 27% since 2021, with average monthly rents reaching £1,369 nationwide, meaning that a full-time worker on the NLW could see nearly all of their post-tax earnings going straight to a landlord. Energy bills have also soared by 43% compared to winter 2021 levels, and transportation fares have risen sharply too, with the national bus fare cap jumping 50%. Most noticeably, food prices have risen sharply, climbing by more than 25% since before the pandemic, with a 3.7% increase at the end of 2024 alone, further squeezing household budgets. This reality underscores why a higher nominal wage doesn’t automatically translate into comfort or security, as collectively, these escalating costs have significantly diminished the real value of nominal wage hikes, leaving low-wage earners with a limited improvement in disposable income.

Yet amongst all of these price pressures, it is the housing market that plays the biggest role in why the reportedly positive minimum wage story struggles to address the underlying inequality plaguing much of the population. Today’s millennials and Gen Z have grown up in an era of prohibitively expensive housing and dwindling defined-benefit pensions, a stark contrast to many ‘baby boomers’ who benefited from decades of rising property values, affordable home prices in their youth, and generous pension schemes. Consequently, only about 31% of people in their mid-20s to mid-30s own their home, down from 55% in 1990, with the vast majority of under-35s now renting. Consequently, in regions where the housing supply is tight, landlords and property owners often capture the gains of wage increases by raising rents, with each boost to the NLW partly funnelling into higher rents. This creates a vicious cycle benefiting asset owners more than workers, where NLW employees receive a raise, but simultaneously their rent rises, leaving them little better off while further enriching those who own property. This contributes to a widening of intergenerational inequality that a higher hourly wage alone cannot fix, as it fails to address the cumulative advantages of older generations and often further reinforces the wealth divide.

Furthermore, the limits of the minimum wage as an inequality cure-all becomes clearest when we zoom out to the bigger picture of wealth distribution, as Britain’s wealth gap has been growing steadily even as the wage floor has risen, with the bottom 50% of the population owning less than 5% of the nation’s wealth. This divide has only been magnified by years of asset price inflation, with soaring house prices and annual stock market gains, which predominantly benefit those who already have assets. Whereas, the typical family in the bottom half of the wealth distribution has negligible savings and no property, so any increase in the minimum wage may help to cover elevated living expenses, but won’t build wealth. The scope of the NLW policy is far too small, by design, as it tackles wage inequality through narrowing the gap between the lowest-paid worker and the median worker, but doesn’t touch wealth inequality. Without parallel policies that tax wealth more effectively, expand asset ownership amongst the younger generation, and curb excessive rents, the fundamental gap in financial security will remain indefinitely.

In the last 25 years, it has become clear that neither the most optimistic hopes nor the direst warnings about the minimum wage have fully materialised. We have seen how, in robust economic conditions, with decent productivity growth and supportive housing and tax policies, a higher minimum wage can yield significant benefits for society’s lower earners. Yet, more recently, in times of economic stress or high inflation, the limits of the policy are clear, with pay rises getting quickly overtaken by price increases, and any improvement in real purchasing power being far narrower. Despite this, the PR success of the policy over the years has meant that further sizeable year-on-year uplifts are more likely, despite its ineffectiveness when addressing the more foundational issues of true inequality.

The UK now finds itself stuck in a loop of successive wage hikes that will yield diminishing returns, their value eaten away by rising prices, reduced hours, and vanishing opportunities for the most vulnerable groups. In order to address the underlying forces driving national inequality, the government must implement a broad range of policies that truly work at scale. Productivity must keep pace with wage increases, housing markets must not siphon away all the gains in rent, and tax-benefit systems need to ensure that take-home pay actually rises in real terms. The current approach to low pay is best seen not as a final fix but as an integral piece of a larger puzzle, which must include targeted welfare policies, a rethinking of the housing market, regional investment to boost opportunities, and stronger incentives for genuine productivity improvement. Lifting pay at the bottom does narrow one aspect of inequality and relieves some immediate hardship, but for many, it still leaves a long journey towards true financial security and a more equitable system.