Britain’s recent rise in the minimum wage is raising concerns about inflation and unintended consequences for employee benefits, posing challenges for both British businesses and the Bank of England.
A 10% increase in the minimum wage, also known as the national living wage, introduced in April is straining companies’ balance sheets and hampering hiring, putting Keir Starmer’s Labour government’s ambitions at odds with business groups and the Bank of England, Bloomberg says.
Corporate pressures and hiring restrictions
Business groups have expressed concerns about the latest pay rise. The 9.8% increase, one of the largest ever, is stretching companies’ budgets to the limit and affecting their hiring practices, according to Bloomberg.
The overwhelming victory achieved by labor Party Last week’s pledge to deliver a “real living wage” added to the pressure, with Treasury Secretary Rachel Reeves stressing the government’s commitment to creating thriving jobs and tackling the cost of living crisis in her speech on Monday.
However, business groups, employment experts and economists warn that continued pressure to raise the minimum wage could exacerbate inflation and hamper companies’ ability to offer other employee benefits, such as child care and reduced commuting costs, the agency said.
The previous Conservative government’s policy of increasing wages led to lower job vacancies and higher unemployment, suggesting that companies may be reluctant to hire under the new wage conditions.
Inflation and economic effects
The Bank of England is closely watching Labour’s wage plans ahead of its August meeting, when it will decide on potential changes to borrowing costs. The BoE has warned that the minimum wage hike could have a bigger impact on wages and prices in the wider economy than initially expected, according to Bloomberg.
Economist Jonathan Haskel told Bloomberg that the tight labor market is likely to keep inflation above target, which justifies leaving interest rates unchanged for now.
Wage pressures could reignite inflation, making officials more cautious about cutting interest rates.
Goldman Sachs economists suggested the Bank of England’s impact would be limited, but warned of slower rate cuts if Labour implemented big increases in the minimum wage.
Business leaders have expressed concerns about the higher minimum wage. Alex Baldock, chief executive of Corrys PLC, said the policy could make it more expensive to hire more workers.
Minimum wage jobs on the rise
The increase in the minimum wage has led to an increase in the number of minimum wage jobs, which are expected to reach two million, an increase of 25% from 2023.
Speaking to Bloomberg, Stuart Hyland, a rewards services partner at Blake Rotenberg, highlighted the significant impact on employers, noting that even those who previously earned above the minimum wage are now affected.
Possible solutions
One proposed solution is tax breaks for the lowest earners, although Labour has chosen to maintain the income tax policies of the Conservative government, which has led to the number of workers in the lowest bracket falling each year.
Highland stressed the need to find a balance, saying: “We need to get more money into the pockets of the poorest people in society, but there is a question mark in the minds of many employers about whether this is the right way to do it.
