Labour’s Minimum Wage Plan Becomes Concern for BOE and Business

(Bloomberg) — Britain’s minimum wage increases are threatening to feed through to inflation and unintended consequences for employee benefits, putting Keir Starmer’s ambition to boost wages on a collision course with business groups and the Bank of England.

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Business groups are already complaining that the 10% increase in the minimum wage — also known as the national living wage — that came into force in April is putting a strain on corporate budgets and limiting their ability to hire. Starmer’s Labour government, which took power after a landslide election victory last week, pledged to revamp the lower threshold for pay to reflect a “genuine living wage.”

Chancellor of the Exchequer Rachel Reeves said in her first major speech on Monday that Labour wants to create “a country that is more prosperous, with more good jobs paying decent wages” and address the “causes of the cost of living crisis” boosting pay for working families.

But business groups, employment experts and economists say that constant pressure to boost the minimum wage risks stoking inflation, squeezing businesses and leaving more lower-paid workers unable to tap programs designed to bring down childcare and commuting costs.

The previous Conservative government pushed for strong increases in the threshold for those on the lowest pay, hoping to make work pay for those receiving benefits. Faster increases in wages in the past two years coincided with a drop in job vacancies and increase in unemployment, an indication that executives may be holding off on hiring more people.

The Bank of England is closely watching Labour’s plans to boost pay ahead of its meeting in August, when it will decide whether to ease borrowing costs from their 16-year high. The BOE warned at its June meeting that the minimum wage increase “could be having a greater than expected impact” on pay and prices in the broader economy since the policy has an effect on wages further up the income scale.

Policy maker Jonathan Haskel raised the issue on Monday, saying tightness in the labor market is likely to keep inflation above target for some time — and justify leaving rates on hold for now.

Regional agents and decision maker panel “point to pay settlements of around 5% this year,” Haskel said. That, he said, is “a sign that the matching process between vacancies and unemployment has become impaired. Thus, any level of unemployment is associated with higher vacancies, and thus more wage pressure.”

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The fear is that pay pressures would rekindle inflation and make officials more hesitant to cut rates.

“The implications for the BOE would be limited, but with risks of slower rate cuts if Labour delivered a sizeable increase in the Living Wage,” Goldman Sachs economists said in a note, adding that the policy is “probably the source of greatest risk for domestic companies with higher labor costs.”

Business leaders warn the minimum wage rise forces them to cut hiring and raise prices. It also constrains their ability to lift pay for the rest of their workforce.

Currys Plc Chief Executive Officer Alex Baldock warned the policy may make hiring more workers prohibitively costly. The CBI, the nation’s biggest employers group, has called for a new approach toward boosting living standards. The British Chambers of Commerce has pointed out the limits for what employers can afford.

Labour’s pledge could be interpreted as rising the minimum wage in line with inflation or a more ambitious increase to match the real Living Wage. That might point to the need to lift the minimum wage to 70% of the median wage — up from 66% now, according to the Resolution Foundation.

Many employees aren’t happy either. British workers can give up some of their pre-tax earnings in exchange for benefits like extra days of leave, cycle-to-work arrangements, nursery vouchers or extra pension contributions, as long as their pay sacrifice doesn’t bring them below the national minimum wage. The sharp increase in the lower threshold has left a bigger pool of people earning at that rate — and becoming ineligible for these benefits.

“It’s unfair that low wage workers can’t take advantage of salary sacrifice perks compared to their higher paid colleagues,” said Charles Cotton, senior reward adviser at the Chartered Institute of Personnel and Development. “The chief executive of a company can use salary sacrifice, but the office cleaner or office security person can’t because they don’t earn enough.”

The lack of pay increases meant some staff in the National Health Service — including porters, healthcare assistants, cleaners and 999-call handlers — “can no longer access support schemes they’ve used for years,” said Unison, a workers group.

“They’re now going to be forking out even more on childcare, season tickets and parking,” said Helga Pile, head of health at Unison.

Employers are increasingly struggling to raise salaries at the pace demanded by law, dragging more jobs into the minimum wage category. The number of minimum wage jobs is set to hit 2 million as a result of the increase in the minimum rate, up 25% from 2023 and around 7% of the total workforce, according to estimates from the Low Pay Commission.

“It’s the second 10%-plus increase in two years running, that’s massive for a lot of employers,” said Stuart Hyland, reward services partner at Blick Rothenberg. “Now we are hitting on people who were 20% above the minimum wage two years ago, which is an increasingly large block.”

UK car dealer Vertu Motors recently said the policy led to a doubling of the share of workers it pays at or within 5% of the minimum wage to almost a quarter, citing denied access to salary sacrifice schemes as a key source of mounting staff dissatisfaction. Employment experts also warn that workers at the low end don’t feel like they’re being rewarded for extra effort.

The issue is especially acute in retail and hospitality, which have a higher portion of workers on the minimum wage. It also added inflationary pressure on wages more generally, an issue the Bank of England is watching carefully.

One alternative would be to deliver targeted tax breaks for the lowest earners, according to Hyland. The opposite is happening as Labour opted to stick with the Tories’ stealth tax and keep income tax bands unchanged since 2021 rather than raise them in line with inflation — meaning that fewer workers will fall in the lowest bracket every year.

“We need to get more money into the pockets of the poorest in society, but there’s a question mark in a lot of employers’ minds as to whether this is the right way of doing it,” said Hyland. “It means that someone’s got to pay for it somewhere and we know it’s just going to create price rises.”

–With assistance from Jamie Nimmo and Andrew Atkinson.

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