26 November 2020

The Chancellor’s minimum wage move is a curate’s egg


Among all the many billions of pounds of spending yesterday, Rishi Sunak also announced that he was following the recommendations of the Low Pay Commission (LPC) and increasing the National Living Wage (NLW). That means in April 2021 it will rise by 2.2% to £8.91 and extending it to those aged 23 and over (it currently covers those over 25).

This decision is a bit of a curate’s egg, but with the bad outweighing the good. In an alternative present without the global pandemic and deep recession we would likely have seen the NLW rise by 5.6% to £9.21 in April. As I explained in the recent Centre for Policy Studies report on the NLW,  with rising unemployment and the economic pain only just beginning, a big hike could have been catastrophic for ensuring a jobs-rich recovery, hammering firms and sectors which have suffered most during the pandemic. So, it is certainly a good thing that the Chancellor opted for a far more modest increase.

However, with the OBR forecasting inflation to be just 1.2% next year, the 2.2% increase will still be a real terms rise, which means firms facing a higher cost of employing people. Worse still, the Government’s target of the NLW equaling two-thirds of earnings by 2024 remains in place, meaning there will have to be larger rises in the years to come.

The OBR is predicting further rises of 3.7% in 2022, 5% in 2023, and finally 4% in 2024, despite inflation is forecast to be under 2% until the end of 2024. That will increase the cost of firms employing people, just at the moment when we want to make it as easy and affordable for them to create lots of new jobs. On top of that, even with the more modest increase next year, these rises will likely cost the Government billions more in public sector wages, just at the moment when we should be trying to bring the public finances back into balance.

Potentially more damaging is the fact that the age at which the NLW applies is being lowered from 25 to 23, and the aim is still to lower it to 21 by 2024. Just at the moment when the young are facing the greatest financial hit from the pandemic and are likely to continue to lose out economically over the coming years, this change risks making a bad situation much worse. Forcing firms to pay young people the same wage as their older, more experienced colleagues may seem fair on the surface, but it will create a big incentive for firms to hire older workers at the expense of the young. It would be a real tragedy if in year to come we looked back and found that government policy had pushed many young people into unemployment – yet that is exactly the risk being run here.

In recent years the NLW has become something of a political football with parties competing with each other over who could raise it the most, without much regard to the potential dangers. So it is a good thing that the Government has listened to the Low Pay Commission and hasn’t tried to play too much politics. However, there are big question marks over the evidence the LPC has been using to justify the increases in the NLW that have already occurred, and we still can’t be sure about how exactly minimum wage rises have affected the labour market.

Given this and how uncertain the economic landscape looks to be over the next few years it would have been better if the Government had dropped its two-thirds of earnings target and committed to only raising the NLW in line with inflation for the next few years until the economy is in a stronger position.

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Jethro Elsden is a Data Analyst at the Centre for Policy Studies.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.