The minimum wage is biting the jobs market
In the run-up to the 1997 election, the Tories campaigned viciously against the minimum wage, having earlier warned it could cost up to two million jobs. The debate was lost, but it was not without impact. A concern about rising unemployment drove the Blair government to adopt a piecemeal approach to introducing the minimum wage.
This took the form of the Low Pay Commission, a tripartite body of business representatives, trade unionists and independent economists. Their remit was to recommend a rate that would help the low paid with a minimum possible impact on employment, rather than a figure arbitrarily plucked by ministers. The result was deliberately cautious: the first minimum wage, introduced in April 1999, was £3.60 an hour for adults and a £3.00 development rate for 18–21-year-olds, well under half of median hourly earnings.
In a case of surprising quango success, it appeared to work. Unemployment kept falling, and the Tories’ warnings were duly filed away as scaremongering. The minimum wage became accepted and popular. The Conservatives, in opposition, came to accept, and then in government embrace, the policy. The public also came to widely accept the idea. By January 2014, a YouGov/Sunday Times poll found that two-thirds (66%) supported a “substantial increase” in the minimum wage, while just one-fifth (19%) opposed.
Today, the situation has dramatically shifted. Not only has the minimum wage begun to bite, but there are some signs that public opinion has also become more sceptical.
The shift began in George Osborne’s 2015 budget when, keen to steal Labour’s clothes, he rebranded the minimum wage as the ‘National Living Wage’ and set a political target of 60% of median earnings by 2020. In 2019, Sajid Javid increased it to two-thirds of median earnings and, not to be outdone, in 2024, Rachael Reeves decided to begin phase out lower rates for younger workers. It has now reached £12.71 for those aged 21 and over, around two-thirds of the median hourly earnings and among the highest in the developed world.
The result is the return of basic economics, with a vengeance. Since Labour’s 2024 budget paired another above-inflation increase with a rise in employer national insurance, Britain has lost around 170,000 payroll jobs, more than half of them in hospitality, the sector with the highest concentration of minimum wage workers. The Low Pay Commission itself now describes a “low hire, low fire” labour market, with employers cutting hours, and the number of young people not in education, employment or training passed a million this year for the first time since 2013.
As the reality of the minimum wage has come to bite, so has public scepticism risen. According to the City AM / Freshwater Strategy Poll, a majority (55%) now believe that above-inflation increases in the minimum wage are unaffordable at this time, compared to less than one-fifth (17%) who disagree.
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This squares with a YouGov exercise in 2021, which found that while 67% said £9 an hour was too low, a suggestion of £13, close to where we are today, was considered too high by 46%, compared with 34% who thought it sounded about right.
The minimum wage is having all sorts of deleterious effects on the employment market. To start, around two-thirds of the benefit goes to households in the middle and upper half of the income distribution, with the losers being those at the bottom who are locked out of work – the very people who most need to get onto the jobs ladder, build skills and earn more down the track.
There’s also growing evidence of pay compression. That is, the gap between an entry-level job and a supervisor, a trained care worker, or a qualified apprentice shrinks. That erodes the incentive to take on responsibility, train, or progress, and it flattens the ladder rather than lifting people up it. This can only be bad news for Britian’s productivity malaise.
Undoing past minimum wage increases will be challenging, but there might be a few good options. The first is to pause and revert to the Blair-era Low Pay Commission model, reintroducing more age categories and carefully weighing increases against employment impacts. Another option, if governments insist on keeping an arbitrary target, would be to regionalise the minimum wage. According to research from the Centre for Cities, the national rate is 53% of local median pay in Reading and 82% in Doncaster. A national wage doesn’t make much sense in a differentiated economy.
Matthew Lesh is a public policy fellow at the Institute of Economic Affairs and a director at Freshwater Strategy