Let’s be honest, the ever-rising minimum wage is hurting employment
Rising from £3.60 to £12.21 in just 26 years, the ever-rising national minimum wage isn’t actually helping workers, writes Matthew Lesh
At first glance, this week’s Office for National Statistics labour market data appears unremarkable. Unemployment, employment and inactivity have all remained roughly unchanged. Pay has continued to rise, up 5.9 per cent, in news the government welcomed.
But buried deeper in the release are some ominous developments.
Job vacancies have fallen to 781,000, bringing the total below pre-pandemic levels for the first time since 2021. The number of people on payrolls is also down by 78,000 in March, compared to a drop of 8,000 the month before.
Taken together, this could be the early signs of a weakening labour market. Businesses are thought to have been holding back on hiring ahead of the national insurance tax increase and Trump-related uncertainty.
A less-talked-about factor that could also be beginning to affect the labour market is the minimum wage hike taking effect this month.
A history of the national minimum wage
For several years, politicians of all stripes have asserted that raising the minimum wage is a largely costless exercise. This goes back to the original debate in the 1990s when the then-shiny Blair Labour government introduced the UK’s first national minimum wage. (There had been earlier sector-specific minimums, dating back to Churchill’s time as a Liberal minister in the early 20th century.)
At the time of its introduction, the Tories claimed that the minimum wage could result in as many as 1m job losses. This never eventuated, significantly undermining the case against the policy. It also came as research in the US appeared to show the policy had less of a negative impact than previously thought.
But this may have been a misreading of history. The Low Pay Commission, comprising independent economists and business and union representatives, was mandated to identify a minimum wage rate that would support workers without causing unemployment. It started at £3.60 per hour for adults aged 22 and over in April 1999 – about £6.80 in today’s money after accounting for inflation. It’s perhaps unsurprising that this relatively low figure, even as it was slowly increased, did not significantly impact unemployment (or, for that matter, reduce poverty, which was helped mainly by direct payments from the government targeted at child poverty reduction).
However, the methodology changed in 2015 when the Conservative government introduced a ‘national living wage’ to grow to 60 per cent of median earnings. It was initially intended for those aged over 25 but, under Labour, has been extended to those aged over 21. The minimum wage is now £12.21 per hour. To put this hike in perspective, Jeremy Corbyn’s 2019 ‘radical’ policy was for a £10.00 minimum wage.
Does the minimum wage even help workers?
While the higher minimum will undoubtedly benefit those who maintain their jobs and hours, the risk is to many others. 85 per cent of reliable studies show that minimum wages hurt employment, particularly for the lowest-skilled, inexperienced and young.
It acts to cut off the lower rungs of the employment ladder, removing opportunities to build skills, increase productivity and get higher wages. It’s also questionable whether the minimum wage helps the most needy, many of whom are not in the workforce.
In recent months, the government has raised alarms about rising economic inactivity – particularly among young people who are increasingly reliant on costly welfare support. Yet its own policy mix may be compounding the problem. National insurance hikes, an expanding web of employment regulation and a steeply rising minimum wage risk making it prohibitively expensive for businesses to hire.
If policymakers are serious about boosting employment and reducing welfare dependency, they must reckon with the unintended consequences of their own interventions. Making work pay is one thing, but making work possible is just as crucial.
Matthew Lesh is country manager at Freshwater Strategy and public policy fellow at the Institute of Economic Affairs