An independent report into the impact of the national living wage (NLW) has found that raising minimum wages has only a minimal effect on employment rates while significantly improving the financial position of the lowest paid.
The study, commissioned by former chancellor Philip Hammond to inform government policy on minimum wages, found that while a higher minimum wage would eventually lead to lower employment, there was “room for exploring a more ambitious NLW remit in the UK”.
The Treasury welcomed the report, and said its findings supported plans that had already been announced to increase the national living wage – the statutory minimum wage for employees over the age of 25 – to £10.50 an hour by 2024, equivalent to two-thirds of median hourly income. In September, the government also pledged to bring the age threshold for the NLW down to 21.
- Two decades on, has the minimum wage worked?
- More generous wages and holidays ‘could fix UK’s productivity crisis’
- Government pledges further hike to national living wage
The national living wage is currently £8.21 per hour, and £7.70 for those aged between 21 and 24.
Sajid Javid, chancellor of the exchequer, said: “The evidence is clear that our approach is the right one. We will end low pay by putting the national living wage on a path to increase to £10.50 over the next five years.”
Since a minimum wage was first introduced in the UK in 1999, business groups have suggested it needed to be constrained in order to prevent job losses, even though successive international studies have failed to prove a causal link between the two events.
Get more HR and employment law news like this delivered straight to your inbox every day – sign up to People Management’s PM Daily newsletter here
However, more recently, many retailers and other employers have cited the rapid rises in the NLW as a factor constraining their profitability and cash flow.
Charles Cotton, senior adviser for performance and reward at the CIPD, welcomed the latest report’s findings, but highlighted that employers would still require support to cope with the cost of NLW increases.
“For it to work, we need to think about affordability issues,” Cotton said. “The danger is, if it's brought in very quickly, organisations may be tempted to cut costs in other areas and possibly undertake recruitment freezes or make redundancies."
Cotton added it was "crucial that organisations have enough time to be able to think about how they're going to pay for these increased costs” and said it was important the government also played a role in encouraging employers to improve their productivity.
The study, conducted by Arindrajit Dube, a professor of economics at the University of Massachusetts Amherst, assessed the impact of minimum wage policies in the UK, the US and Europe.
It found the effects of higher minimum wage levels on employment was “muted”, while “significantly [increasing] the earnings of low-paid workers”, and said there was good evidence that “a higher minimum wage could reduce vacancies and turnover instead of destroying jobs.”
While the review highlighted the minimal impact of minimum wages on employment levels, it did acknowledge there was some evidence that the national minimum wage had led to small reductions in hours, and research into the more recent NLW also revealed a small impact on employment and hours.
The evidence base on the effects of high minimum wage levels was still developing, the reported added. It said “careful consideration” was needed before the implementation of any far-reaching policy shift.
“Based on the overall evidence… there is room for exploring a higher NLW in the UK up to two-thirds of the median wage,” Dube concluded, adding: “It will also be important to empirically evaluate and recalibrate any such ambitious policy based on new evidence down the road.”
Speaking on BBC Radio 4’s Today programme, work and pensions secretary Thérèse Coffey said she expected the NLW to “grow and grow, as long as the evidence shows it’s not going to have a bad impact on jobs”.
However, shadow chancellor John McDonnell described the new proposals as “derisory”, and said Labour would immediately introduce a minimum wage of £10 per hour for all workers aged 16 and over.
The government has said it will respond fully to the review in due course.