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Political parties’ minimum wage rises could cause more harm than good

Paloma Kubiak
Written By:
Paloma Kubiak

The Conservatives and Labour have each outlined plans to raise the minimum wage by 2020, but such moves could actually pose a risk to those who are set to benefit the most a think tank warns.

Currently the minimum amount workers are paid each hour is dependent on age. The National Living Wage for all working people aged 25 and over is £7.50 per hour, while the National Minimum Wage for those under 25 again depends on which age bracket you fall into (between £3.40 and £6.95 an hour).

For those aged 25 and over, the Conservatives plan to raise the minimum wage to £8.75 an hour in 2020, which is 5% higher than if it increased in line with average earnings.

Under a Labour administration workers aged 25+ would receive £10 an hour in 2020, which is 20% higher than under the average earnings indexation according to the Institute for Fiscal Studies (IFS).

It said that while a higher minimum wage may be effective at boosting the wages of low earners, a significantly increased wage for some workers is ultimately paid for by other households via higher consumer prices or lower earnings for higher paid workers.

The IFS said that crucially, there must be a point beyond which higher minimum wages have substantial negative impacts on employment and currently this point isn’t known which is why a wage spike could be risky.

In the years leading to 2020, the numbers receiving the minimum wage will rise from 4% of those aged 25 and over (in 2015) to 12% under the Conservative plans and to 22% under a Labour administration, revealing a significant increase.

As such the benefit from minimum wage increases is concentrated among middle-income households, not the lowest-income households. This in part is because many individuals on low wages are in middle- or high-income households because of the earnings of their partner, while many of the lowest-income households have no-one in work at all.

The IFS added that low-income households that do gain are likely to see significant reductions in means-tested benefits as a result of higher wages, offsetting some of the gains.

The report’s authors said the Conservative and Labour parties are both moving away from the previous model of minimum wage setting, in which the independent Low Pay Commission recommended minimum wage levels while carefully considering the consequences for employment.

“There may well be a case for higher minimum wages than we have had up to now. But we do not know at precisely what point a higher minimum wage will start having serious negative employment effects. Therefore, large and sudden increases create considerable risk that those who are supposed to be the beneficiaries of the policy end up paying the cost in higher unemployment or lower hours of work,” it stated.