There should be greater caution in setting minimum wages, says think tank

Following yesterday’s announcement that the Chancellor plans to raise the minimum wage to £9.50 an hour, Professor Len Shackleton, Editorial and Research Fellow at free market think tank the Institute of Economic Affairs, said: “The labour market is surprisingly healthy at the moment, confounding the predictions of those expecting a massive rise in unemployment after the ending of furlough. We have healthy levels of employment, record vacancies and rising pay.

“However, smaller businesses in particular face a worrying time. With tax increases already pencilled in – including the planned increase in national insurance contributions – there should be greater caution in setting minimum wages,” he went on, adding: “The government may be calculating that higher pay may mean more tax revenue and less paid out for in-work benefits, but such modest benefits to the public purse may be negated if unemployment rises as businesses cut back on recruitment.

“It is disturbing to see that the Living Wage Foundation apparently has as much, if not greater, influence than the Low Pay Commission. With the Opposition in favour of further rises, it is likely that we will see a bidding war at the next election.”

Research published yesterday by the Liberal Democrats concluded that a full-time worker paid the national living wage will see nearly half (44%) of the proposed increase wiped out before it even reaches their bank account due to tax and the increase in National Insurance.

The national living wage is the minimum hourly rate which adult workers in the UK, aged over 23, must be paid.

In 2020/21 the statutory national living wage was £8.91. It is the government’s intention to see the national living wage rise further in future years, reaching 66% of median earnings by 2024.

Given median earnings (the midpoint of UK salaries) were circa £30,800 in 2020, this represents a commitment to see minimum salaries in the UK rise above £20,000 per year by 2024.

The national living wage came into effect in 2016 as a higher version of the previous national minimum wage for most adult workers. The national minimum wage is now a terminology that officially just refers to those under the age of 23.

In 2020/21, the national minimum wage was £8.36 per hour for those aged 21-24, £6.56 for those aged 18-20, and £4.62 for those aged 16-17. There is then an additional apprentice rate of £4.30.

The government has set a target for the national living wage to reach 66% of median earnings by 2024. This comes on the back of previous government plans for the national living wage to reach 60% of median earnings by 2020.