When the Minimum Wage Rises, the Young and the Economy Pay the Price

British public policy has a habit of locking onto autopilot, before discovering too late that reversing course is politically toxic. Land use planning is one example. The triple lock is another. And aggressive uplifts in the minimum wage are increasingly a damaging third.

Successive governments have kept pushing minimum wages up despite the evidence shifting. Westminster seems trapped in the comforting assumptions of the 2000s, when the Low Pay Commission’s (LPC) cautious increases seemed to lift pay without reducing headline employment. That bred a complacency that minimum wage rises might boost employment, or at least finance themselves through a happier, more committed workforce.

After two decades of dire productivity growth, it’s unclear why people still believe this. Fresh American evidence, drawing on state and local wage variation, suggests high minimum wages still reduce new hiring and shut off entry-level jobs. More pertinently, economists now find that there are other significant costs beyond any employment impacts.

Last week the national living wage rose again, to £12.71 an hour, given the government’s two-thirds-of-median-earnings target. Yet the LPC’s latest report, focused on the 2025 uplift, shows many harms beyond the simple employment effects, several of which hurt low-wage workers themselves.

The report depicts an ossified “low-hire, low-fire” labour market, in which companies most exposed to the wage floor have faced “weaker employment growth”, employers have cut recruitment and staff hours in response to the rise, and average hours for minimum wage workers remain below pre-pandemic levels.

This is where modern evidence shows how high minimum wages bite. Not through mass sackings, but slower hiring, weaker workforce attachment and fewer entry-level opportunities. Young people, who rely on first jobs to gain a foothold, suffer disproportionately, compounded now by Labour’s compression of special youth rates towards the national minimum.

Businesses are not charities. Mandate higher hourly pay and they must adapt. The report documents complaints from workers and unions about more “intense and challenging” work, employers changing shifts and increasing performance expectations. This might wring some extra output from staff. But it is by raising work intensity and reducing job quality, rather than the happy tale of investment-led productivity growth.

Minimum wage advocates seem to believe that a higher wage floor necessarily forces businesses to invest more in machinery and training. But many told the LPC that higher wage costs mean they simply “don’t have the funds to train people”, with 44 per cent of Federation of Small Businesses respondents saying they scaled back investment as the minimum wage rose. Add wage compression, which blunts the reward for promotion, upskilling or moving to other companies and you can see how higher wage floors can harm aggregate productivity.

Then there’s the workforce composition effect. Over time, the incentive shifts further against the inexperienced. Employers, quite rationally, prefer to hire workers who already have proven their productivity rather than take a punt on first-job candidates.

When squeezing or replacing workers is not enough, employers look to other ways to control costs. The report notes that more are resorting to zero-hours contracts and irregular shifts in low-wage industries. Some businesses axe non-wage benefits or other pay differentials. Sunday premiums get replaced by flat overtime rates, for instance. Once all adjustments are accounted for, many employees report being little better off.

Whenever I describe these effects, some retort that the LPC says many companies instead raise prices or eat lower profits. But these are not social freebies! Price increases are usually akin to a regressive sales tax. Lower expected profits deter business entry and experimentation. Indeed, when politicians boast that companies absorb the cost, they really say that some businesses will never be created, expanded or sustained.

Every year, increasing this wage floor is treated by ministers as a good news headline. Beneath it, the evidence shows our high minimum wage is undermining incentives for an efficient, dynamic economy.