Duncan Brown: Will the national living wage have unintended consequences for employers?

Duncan Brown

When the national minimum wage (NMW) was introduced in 1999, employer bodies and classical economists predicted the loss of millions of jobs as the unintended consequence of such generous ‘over-payment’, as low-skilled workers priced themselves out of the labour market. It did not happen, and even during the recession, rates of employment held up remarkably well.

The new national living wage, the Chancellor’s surprise Budget announcement to raise the NMW for over-25s to £7.20 an hour and £9 by 2020, has occasioned a similar response. Far from celebrating that 2.7 million workers will see a rise in their standard of living – three-quarters of them women, which will also help to address child poverty – The Economist gloomily predicted that “policy makers are accelerating into a fog” that risks “pushing some workers out of the labour force for good”.

But these employers, which have a cost-minimisation, rather than human capital model of employment, might receive a much better surprise – one the Chancellor is counting on as part of his 15-point plan to address the ‘productivity puzzle’ of why we are 25% less productive than our major international competitors: because we have too many low-skilled, low-paid, low value-adding workers.

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These employers will hopefully be forced to invest in training and developing their staff, and in the process will learn that higher-paid, higher-skilled and more engaged staff generate proportionately more in financial returns for their firm and for the economy as a whole. Employers ranging from Queen Mary’s University to KPMG, and a raft of US research on the positive effects of higher minimum wages in cities such as Seattle, all demonstrate this. Paying staff well pays off, for them, their employer and the economy.

Duncan Brown is head of HR consultancy at the Institute for Employment Studies