Recently, I was asked by a journalist to outline why I was opposed to the introduction of the National Living Wage. Here was my answer.

The National Living Wage (NLW) is a huge policy change – not just in that it significantly increases the national minimum wage for over-25s, but because it fundamentally overhauls the institutional framework through which minimum wages are set in the UK.

To my mind there are three reasons why this will be harmful.

First, the overwhelming consensus of the academic literature here is that the level of the national minimum wage still matters in terms of employment effects, and that a significant increase such as this will reduce labour demand, particularly for low-skilled workers. The OBR has estimated this will cost 60,000 jobs by 2020, and at least some of these are likely to be locked out of the labour market completely as a result, thus unable to benefit from building transferable work skills such as punctuality, dealing with colleagues and customers. Research from the Social Market Foundation has highlighted the danger here: around half of workers in the most affected workplaces are part-time; 28 per cent of those immediately affected work in jobs requiring no formal qualifications, such as labourers and cleaners; 40% of those employees affected have qualifications only up to GCSE or equivalent; over 50% affected are young (25–29) or old (over 50); and, finally, severely affected workplaces are currently much less likely to provide training to staff.

Many of these low-skilled jobs occur in very competitive industries, such as retail, so one would theoretically expect that disemployment effects would be more likely here than in industries which are more monopsonistic. Farming and the care industry in particular are likely to be hit hard. This effect may be even larger if the national living wage rise – in effect a tax on businesses employing low-skilled workers – leads to substitution towards otherwise uneconomic capital investment to replace labour. Of course, not all firms heavily affected will lay off staff or cut hours. Other unintended consequences are likely to be a greater proliferation of zero hours contracts and unpaid ‘internships’ as firms seek alternative ways to control their costs.

Proponents of the NLW blandly reply that firms should ‘improve productivity’ to counter this, as if nobody had ever thought of ways to make their workers more productive. And for the reasons outlined above, improving productivity is often not costless. It is not clear why George Osborne or anybody else has a greater knowledge in setting a wage which facilitates beneficial productivity improvements across different industries than business owners and managers.

The second set of harmful effects relates to the institutional framework. The NLW has shifted both the purpose and means of wage setting, with the increase in value leading to a situation where 20% of the private sector workforce will have their wage determined by government. The minimum wage was originally about ending exploitative low pay and tackling supposed monopsonistic behaviour in the labour market. The Low Pay Commission set it taking into account the likely effects on employment and made recommendations independent of government. Now, the NLW has been determined by politicians, and from 2020 will be set at 60% of median earnings.

This is not about eliminating ‘exploitative low pay’ any longer, but about maintaining a more equal distribution in the bottom half of the labour market. By undermining the Low Pay Commission – now in effect just a monitoring body, rather than a wage-setting body – Osborne has opened the door for future Chancellors to increase the NLW much more significantly, unlinked to firms’ ability to pay and the general health of the economy. This institutional change then is likely to be far more damaging over time. And even though the 60 per cent of median earnings mechanism should mean that the value of the NLW should fall if median earnings fall after a recession, one suspects that the newly politicised nature of the NLW will lead to significant downward rigidity! It is difficult to imagine politicians being willing to slash the hourly statutory rates for many low-skilled workers in the height of a recession. Indeed, much of the pressure for the increase in the minimum wage came about precisely during recession-induced wage stagnation.

Politicisation of this could be very toxic indeed. This is linked to the third reason this particular policy could be particularly harmful, which is the name ‘National Living Wage’ – which the Chancellor has adopted to try to negate the Living Wage Foundation’s campaign. In appropriating the name National Living Wage, Osborne has opened his new NLW to always be compared to the Living Wage campaign, which is higher than he plans and will be much higher still given tax credit cuts through Universal Credit (which are included in its calculation). The most damaging aspect of this is the intellectual idea will take hold that business should set wages so as to cover the living costs of their employees, as opposed to paying people for the work they do. Given an ongoing political unwillingness to tackle high housing, childcare and energy costs through market liberalisation, we should expect much more democratic and political pressure about firms not paying their workers fairly, whilst politicians continue to structurally raise the cost of living through tight planning laws, an increasingly regulated childcare sector and an expensive energy policy.

Ryan Bourne is the IEA’s Head of Public Policy. For more on this subject read:

·         The Minimum Wage: silver bullet or poisoned chalice? by Len Shackleton and Ryan Bourne.

·         Budget 2015: The ‘Living Wage’ is economically useless and intellectually empty by Ryan Bourne.

·         What’s wrong with Osborne’s ‘Living Wage’ proposals? Ask me what’s right about them by Ryan Bourne.

·         The Living Wage: beware the trade-off deniers by Ryan Bourne.