Should the government scrap the National Living Wage?

The Adam Smith Institute has called on chancellor Philip Hammond to abandon the National Living Wage (NLW) – introduced last April – in favour of giving the Low Pay Commission full powers over the minimum wage.

At present, just 5% of the UK workforce receives the minimum wage, though this figure is expected to see a rapid rise as the NLW increases to £9.02 over the next three years.

According to the report, this increase has the potential to accelerate workforce automation, leading to rising unemployment and criminal behaviour. This would have the knock on effect of increasing consumer prices and hampering the progress of low skilled workers throughout their lives.

Businesses would be forced to find ways of funding rising wages to protect their profits, meaning they could either hire fewer but higher skilled workers, invest in automation or outsourcing, or raise consumer prices.

The report claims that products subjected to a price increase are disproportionately bought by the least well off, meaning that even if their wages do rise, their cost of living rises in tandem.

A study from the Federation of Small Businesses (FSB) last September claimed that the NLW had led many small firms to increase their prices and reduce staff hours.

The Low Pay Commission was responsible for the National Minimum Wage until the introduction of the NLW in 2016

In light of its research, The Adam Smith Institute has called on the chancellor to scrap the NLW in the Spring Budget and return power over the minimum wage to the Low Pay Commission.

It also recommends increasing tax credits and introducing Negative Income Tax to boost incomes further but avoid rising unemployment and other unintended consequences.

Sam Bowman, executive director of the Adam Smith Institute, commented:

“There is an important difference between the National Minimum Wage and the Living Wage, in that the former is set by a panel of experts with a mandate to minimise the risk of job losses, but the Living Wage is set by politicians whose main interest is looking good on the Ten O’Clock News.

“That’s a recipe for disaster, and we believe that direct cash transfers like tax credits or a Negative Income Tax would be much less risky ways of helping people at the bottom than the National Living Wage.”