Dramatic increases in the minimum wage planned by Labour and the Conservatives after the general election will put the jobs of low income workers in danger, a leading tax and spending thinktank has warned.
The Institute for Fiscal Studies said accelerating the pace of rises in the minimum wage and the “national living wage” (NLW) for the rest of the decade could price workers out of a job, with young people the worst affected.
The thinktank was most scathing about a Labour party pledge to push the minimum wage for those aged 18 and over up to £10 an hour by 2020.
It said forcing employers to pay at least £10 an hour would mean 60% of young workers would be on the minimum wage and many would be likely to lose their jobs.
Middle income earners would also be the biggest winners as many of the lowest income households have no one in work at all and low-income households that do gain “are likely to see significant reductions in means-tested benefits as a result of higher earnings”.
Jonathan Cribb, an economist at IFS and an author of the report, said: “At some point, higher minimum wages will reduce the employment of lower skilled workers. Since we do not know where that point is, sudden large increases are risky.
“Labour’s proposal to rapidly extend a £10-per-hour minimum wage to 18-24-year-olds, regardless of the state of the economy in 2020, is a particular gamble. Given how harmful periods of unemployment can be for young people, the long term costs could be considerable.”
HMRC finds hundreds of firms each year paying below the minimum wage. This year was the first that HMRC revealed the names in a move to “name and shame” employers.
Retailers Debenhams and Peacocks were named, while Argos was forced to pay £2.4m in wages to more than 37,000 current and former shopworkers, and was fined nearly £1.5m after an HMRC investigation.
Earlier this week John Lewis revealed that it profits would be cut by £36m after it found a payroll error that breached minimum wage rules.
The IFS report argued modest increases in the minimum wage recommended by the low pay commission each year from its inception in 1999 until 2015 succeeded in raising wage levels at the low end of the pay scale without hurting job creation.
Former chancellor George Osborne created NLW, which applied to people aged 25 and over and paid £7.20 an hour, compared with the £6.70 minimum wage for workers aged 21 and over. Osborne said he hoped the NLW would reach £9 an hour by 2020.
The IFS argued that this jump, while more modest than Labour’s proposals, still breached the understanding between the unions, employers and government under a tri-partite agreement to review the level of minimum pay each year on the low pay commission.
It said the outgoing Conservative government increased the proportion of employees aged 25 and over paid the NLW from 4% to 8% and it will rise to 12% under current Tory plans by 2020.
The report found that part-time, female and private sector employees and those in the North of England, the Midlands and Wales were most likely to be affected by the proposed increases.
For those aged 25 and over, under Labour’s plans Whitehall would effectively be setting the wages of around quarter of female employees, one quarter of private sector employees and one quarter of employees in the Midlands, North of England and Wales.
A £10-an-hour minimum would also lift the wages of part-time employees so that half of this group were on the minimum wage.
