Why raising the minimum wage for young people will not cost jobs

Tom Belger
Finance and policy reporter
The government is raising the legal minimum wage. Photo: In Pictures Ltd./Corbis via Getty Images

Tens of thousands of low-paid young workers are set for a pay rise, after UK chancellor Sajid Javid unveiled plans to raise the legal minimum wage for under-25s.

Javid pledged to scrap the lower minimum wage rate for 21-24-year-olds in his speech to the Conservative party conference, raising the pay floor to the higher ‘living wage’ rate currently set for over-25s.

About 175,000 workers aged 21 to 24 are currently reported to earn the legal minimum for their age group of £7.70 an hour. The rate for workers aged 25 and over is set at £8.21.

His pledge to “reward the hard work of all millennials” came alongside a commitment to raise the national living wage to two-thirds of median pay, and was welcomed by some think tanks.

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But business leaders voiced their fears, with the Institute of Directors warning increasing rates “risks forcing firms to reduce staff numbers” and the Federation of Small Business (FSB) warning it could “make some small firms unviable.”

The impact of minimum wage policy on employment levels has sparked debate for decades, particularly since the national minimum wage was introduced in 1999.

But evidence published on Monday suggests the government’s plans are not likely to make young workers unaffordable and increase joblessness.

Bryan Sanderson, chair of Low Pay Commision, which carried out a review of wage rates, set out why his organisation backed the move in a detailed letter to the government published online.

Previous rises have had little impact on employment figures

Britain saw “no negative effects on employment” for 21-year-olds when the minimum wage was extended to them from its previous starting age of 22 in 2010, according to the letter.

Sanderson said there was even evidence it “stimulated movements into employment” for some young people, despite it hiking the wage floor by a steep 20% and being launched just after the financial crisis.

The Low Pay Commission also highlighted earlier this year how the “conventional wisdom” had suggested the national minimum wage would force workers out of jobs when it was introduced under prime minister Tony Blair in 1999.

But it said in a report that two decades of increases had not damaged employment, becoming an “established” part of the UK labour market with cross-party support.

Nye Cominetti, an economic analyst at the Resolution Foundation, said the policy had been “one of our big policy success stories” in recent decades.

Former prime minister Tony Blair introduced a national minimum wage. Photo: PA

Firms will have time to prepare

Mike Cherry, chair of the FSB, called for the plans to be introduced gradually, warning a “sudden drop to 21 poses a real risk to jobs and the economy.”

But the government has signalled it will act cautiously, raising pay for workers aged 23 and over only from 2021 and for 21-year-olds only within five years.

Kate Palmer, associate director of advisory services at employment law consultants Peninsula, said the advance announcement “will mean that some forward planning is possible, and budgets can be set accordingly.”

Only a tiny number of young workers actually earn the minimum wage

Sanderson said most employers were already paying at least the higher national living wage to everyone aged 21 and over, rather than just to workers over 25 as required by law.

Only 6% of workers aged 21 to 24 currently earn the legal minimum wage, suggesting the policy’s impact could be less significant than some might expect.

Many employers back the plans

The “majority” of employers in low-paying sectors said they supported extending the living wage to workers from 21 in a consultation by the Low Pay Commission, according to Sanderson.

It found there was “not unanimous” support, but most organisations backed the move and believed it reduced the complexity of implementing different rates for different age groups.

Many young staff do the same work as older staff

Sanderson also said there was “little basis” for treating 23- and 24-year-olds in particularly any differently to older workers.

He said levels and forms of employment and education among the age group were largely similar to 25-year-olds.

Employers recognised the fairness of paying the same rate for generally doing the same work, with “minimal differences in experience and productivity, particularly in low-paying sectors.”

But he said the case was “less clear-cut” for 21- and 22-year-olds newer to the labour market, backing a further review before they also see their lower rate scrapped.

Carys Roberts, chief economist at the IPPR think tank, said the move was particularly welcome after “the worst decade for earnings growth in two centuries.”

Employment levels have never been higher

The Low Pay Commission said current economic conditions also boosted the case for change, with enough other job opportunities available even if hiking the wage floor did deter some hiring.

Sanderson said a period of record official employment figures and tightening labour market “are likely to offer protection to young workers.”

Roberts of the IPPR said: “The evidence suggests given current economic conditions, this can be safely done without an increase in unemployment.”

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