MNI INTERVIEW: UK Minimum Wage Hike Poses Jobs, Prices Risk
MNI (LONDON) - Rises in the UK National Living Wage and payroll taxes set for next April risk pushing down on employment and up on inflation, the Institute for Fiscal Studies' Eduin Latimer, previously an economist at the Low Pay Commission which advises the government, told MNI.
International studies on minimum wages have tended to find no clear effects on employment, but Latimer noted that the UK was near the top of the international pack for the lowest paid, with an imminent 6.7% increase for over-21-year-olds following hikes of over 20% in the previous two years.
"We haven't found evidence of negative employment effects yet but there is uncertainty over the effect of recent rises as the UK is getting close to the frontier ... of minimum wage rates internationally," Latimer said, stressing the significance of the rise in employers’ National Insurance Contributions set to take effect at the same time.
"One reason ... this latest rise might be more likely to have employment effects than previous rises is that it comes alongside the employer National Insurance increases ... And that means the labour costs for the firms are actually going up significantly more for minimum wage workers than just the increase in the minimum wage," he said
"The structure of the Employer National Insurance Contributions increase announced at the Budget disproportionately affects minimum wage workers, and especially part-time minimum wage workers," Latimer added. "The cost of hiring a part-time minimum wage worker will increase by 11% next April compared to the previous April. So, there are some risks there.” (See MNI INTERVIEW: UK Budget Ups Inflation Pressure - OBR Miles)
WAGE COMPRESSION
The Bank of England Monetary Policy Committee has identified the hikes in the National Living Wage and NICs as a key source of uncertainty for the economic outlook, with firms able to respond in a variety of ways, including by accepting reduced profit margins and narrowing pay differentials, or by hiking their prices and reducing jobs. The MPC will revisit the subject in its February forecast round.
“The actual effects on headline inflation will probably be relatively small, because only so many firms are exposed to the minimum wage, and not all of them are in consumer-facing sectors,” said Latimer. “The sectors with the most minimum wage workers are hospitality, retail, cleaning, social care ... but not all firms in these sectors will be affected by the minimum wage.” (See MNI POLICY: BOE Braces For Trump Impact Without Scenarios)
But, he added, firms may struggle to resist demands for pay rises from people earning more than the National Living Wage workers.
"There is likely to be a minimum viable level of compression that firms can operate with before affecting the incentives to progress within the firm. If that's the case, then you end up in a scenario where more people are affected by each minimum wage rise, and firms have less flexibility to absorb it through wage compression," Latimer said.
As of April 2023, while only 5.4% of jobs for over-21s were paid the National Living Wage, another 18% were paid within GBP1 of it.
"We've gone a fair way on that compression journey, which means that now any minimum wage rise effects more peoples’ wages than it would have done 10 years ago," Latimer said.
Without wage compression to absorb the hit, firms "will have to look more to other channels, such as prices. So that's one reason why you might think a given percentage increase in the minimum wage now is likely to have a bigger impact on ... prices than it would have done 10 years ago," he said.