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The Case Against Raising the Minimum Wage

The Case Against Raising the Minimum Wage
  • The Government is committed to raising the National Living Wage to two thirds of earnings, and extending it to cover those aged 21-25.

  • The Office for Budget Responsibility was already forecasting that unemployment would rise by at least 50,000 due to planned minimum wage increases. But the pandemic makes the situation much worse, potentially extending this figure into the hundreds of thousands.

  • The sectors worst-hit by the coronavirus - hospitality, retail, social care - are also those where the increased employment costs of a higher minimum wage are most likely to be felt.

  • Lowering the age of eligibility to 21 will discourage firms from hiring young people at precisely the time when we should be doing everything we can to create new jobs and avoid the scarring effects of long-term unemployment.

  • There will also be a significant cost to the public finances, of at least £2.4 billion.

  • Given the overwhelming importance of creating and preserving jobs in the recession, the Government must put its planned NLW extension on hold to avoid increasing employment costs for the most vulnerable at the worst possible time.

Job creation and economic growth will be put at risk if the government raises the National Living Wage in the immediate future, argues a leading think tank today.

The 2019 Conservative Party manifesto included a commitment to raise the NLW by over 20% and lower the age of eligibility from 25 to 21 by 2024. This would mean the minimum hourly income going from £8.72 to £10.50 for all those over the age of 21.

The Centre for Policy Studies (CPS) has published a new report  today highlighting the risks of such a policy for employment during the recession.

The think tank is urging the Government to prioritise protecting and creating jobs during the recession, especially in those sectors hardest hit by the pandemic. It argues that raising the minimum wage, and extending it from 25 to 21 year-olds, will harm the employment prospects of younger workers who face a lifelong detrimental impact from youth unemployment, as well as disproportionately hitting sectors such as retail and hospitality that have been most affected by the pandemic.

Increasing the National Living Wage so sharply, and extending it to cover those aged 21-25, will also impose heavy costs on those businesses that are already struggling as a result of the lockdown, discourage job creation and incentivise employers to discriminate against the young. It will also have a heavy cost to the state, estimated by the CPS at a minimum of £2.4 billion, which will be felt particularly in the social care sector.

Even before the pandemic, the Office for Budget Responsibility forecast that the National Living Wage increase in April 2020 would increase unemployment by 50,000 and reduce real GDP. The Institute for Fiscal Studies has also warned that the evidence base on the impact of further rises is extremely weak.

The CPS is therefore urging ministers to put on hold the planned increase in the National Living Wage, as well as its expansion to those under 25, to avoid punishing the most vulnerable workers and increasing costs for the companies hardest hit by the pandemic. 

Jethro Elsden, CPS Researcher and Data Analyst and report author, said: 

“The generosity of the impulse behind raising and expanding the National Living Wage can only be applauded. But going ahead with the current plans will harm the very people it is designed to help.

 “This policy would not only threaten to increase unemployment, but would hit precisely those sectors, regions and age groups that have already suffered the most from the coronavirus, not to mention imposing a significant additional cost to the Treasury. It would also increase the burden on businesses at a time when their burdens are heavier than at any time in living memory. If anything, we should be cutting the cost of employment, not increasing it.”


Jethro Elsden - Sunday 15th November 2020

Jethro Elsden is a Data Analyst and Researcher at the Centre for Policy Studies. His main interests are: Data, Productivity, Business, and Agriculture. He has helped to research and write several reports, including costing Labour’s Four-day week, Make Work Pay, Budget for No deal, Think Small, Herding Unicorns, and has written for CapX.