Employers set for biggest ever increase in cost of employing part-time staff on minimum wage

The combination of rises in the National Living Wage (NLW) and employer National Insurance (NI) this week will massively increase the cost of employing low paid workers and should prompt a rethink in how the minimum wage is set in future, according to new Resolution Foundation research published today (Monday).

Minimum wage, maximum pressure notes that the 6.7 per cent rise in the National Living Wage – from £11.44 to £12.21 on 1 April – is not particularly high by recent standards, being the seventh biggest in real terms. Far bigger rises are in store for young workers, with the 16-17 rate rising by 18 per cent, and the 18-20 rate by 16.3 per cent.

However, the interaction of these rises with employer NI increases, which come into effect on 6 April and raise £26 billion in total (before allowing for wage and employment adjustments), mean that labour costs are rising rapidly for employers.

Cutting the threshold above which employer NI is paid from £9,100 to £5,000 will disproportionately affect low earners. The cost of employing someone on £10,000 will rise from £124 to £750 – increasing their labour costs by 6.2 per cent. In contrast, the 1.2 per cent increase in the employer NI rate will raise labour costs for someone on £50,000 by just 2 per cent.

These costs are even starker for workers earning the National Living Wage. The labour costs of someone working full-time on the adult minimum wage rate will rise by 10 per cent this week – not far off the highest ever rise of 12 per cent when the NLW was introduced in 2016. For someone working part-time (16 hours) on the minimum wage, their labour costs will rise by 14 per cent – the biggest ever increase in the history of the minimum wage.

While much of the employer NI rise will be absorbed in lower wages, this is not possible for workers already on the minimum wage. The risk instead is that the rise will be absorbed through reduced hiring, or lower hours.

This awkward interaction between the Government’s labour market and tax policies has needlessly created employment risks around the upcoming rise in the minimum wage, says the Foundation. This should prompt a rethink about how to align policy in the future, especially if the Government wants to continue to have an ambitious policy that boosts pay for millions of workers.

First, the Government should ensure that tax policy aligns with minimum wage by giving the Low Pay Commission sight of any tax changes that are likely to affect low-paid workers before it makes its recommendations on pay rates.

Second, while the minimum wage should continue to rise relative to typical earnings, it should do so cautiously, so that any significant employment effects can be assessed.

Third, particular attention should be paid to the effects of a fast-rising wage floor on younger workers, who are most at risk of job losses given their experience and power in the workplace.

Finally, an ambitious agenda for low-paid work should stretch beyond the minimum wage. The Government should press on with welcome new employment rights, which could have an even more positive effect on working conditions for low-paid workers than a higher minimum wage, and build on them with new Fair Pay Agreements in  key sectors like social care.

Nye Cominetti, Principal Economist at the Resolution Foundation, said:

“The minimum wage has been a huge success over the past 26 years, delivering huge pay gains for workers and defying its critics who have warned about job losses.

“But while the latest rise in the National Living Wage is not big by recent standards, it may still be its riskiest rise yet, as it coincides with big payroll tax rises that massively increase the cost of employing low-paid workers.

“The Government should avoid repeating these risks by ensuring that tax policy aligns with the minimum wage, and by carefully monitoring the impact of future minimum wage increases.

“However, Ministers should not curb their ambition when it comes to their wider agenda on low-paid work, as new employment rights could be just as transformative as the National Living Wage.”