Business chiefs have criticised Rachel Reeves’ decision to hike the national living wage by more than 4 per cent for most British workers at the Budget.
In a final announcement before unveiling the full set of fiscal measures, the Chancellor said she would back the Low Pay Commission’s recommendations to raise the minimum wage to £12.71 for all over 21-year-olds.
The living wage for those aged between 18 and 20 will increase by 8.5 per cent to £10.85 an hour as the government looks to “narrow the gap” in pay between younger and older workers.
Pay for 16 and 17-year-olds and those on apprenticeships will increase by 6 per cent to £8 an hour.
In a video statement published on the eve of the Budget, Chancellor Rachel Reeves said: “I know that the cost of living is still the number one issue for working people and that the economy isn’t working well enough for those on the lowest incomes.
“That’s why today I’m announcing that we will raise the national living wage and also the national minimum wage, so that those on low incomes are properly rewarded for their hard work.
“These changes are going to benefit many young people across our country, getting their first job.
Risk to inflation and jobs
However, leading economists and business chiefs are raising concerns about the plans, which some argue could stoke inflation and add to payroll costs.
Business groups have pointed out that costs from higher living wages will be passed onto consumers, stoking inflation after a Budget focused on price growth for British consumers.
Several Bank of England policymakers including deputy governor Clare Lombardelli have signalled their fears about high wage growth leading firms to push up prices in what is widely referred to as “second round effects”.
Kate Nicholls, chair of UKHospitality, said: “Increases to minimum wage rates are yet another cost for hospitality businesses to balance, at a time when they are already being taxed out.
“Hospitality businesses have reached their limit of absorbing seemingly endless additional costs. They will simply all be passed through to the consumer, ultimately fuelling inflation.”
Michael Stull, UK managing director of the recruitment firm ManpowerGroup warned that hiking the living wage would push labour costs up while young people could suffer more from lower hiring levels.
“Overall this will not be encouraging, this will be impacting those people doing work for the first time.”
Living wage rise will be ‘barrier’ for youth
The Recruitment and Employment Confederation (REC) chief executive Neil Carberry agreed with Stull’s assessment, pointing out that many costs facing business were set by regulators rather than by the economy itself.
“I would have exercised more caution given the challenges we have with rising unemployment,” Carberry said.
“In this environment, with these challenges, it feels like a barrier for young people into work.”
Business leaders are also calling for the government to offer support with costs if it chooses to hike wages.
The Confederation of British Industry (CBI)’s director of work and skills Matthew Percival said: “We must ensure that these measures avoid undermining both economic growth and vital labour market initiatives like the youth guarantee.
“With young people already amongst the most affected by the lack of vacancies across the economy, we need to take extra care to guard against moves that might make it even more difficult to get young people into employment.”