Budget 2015: Five unintended consequences of the new living wage

The announcement of a new 'living wage' was encouraging news for millions of low paid Britons - but read on before you pop open the champagne

The UK currently has a minimum wage of £6.50 per hour but from April 2016 it will rise to £7.20 and then go up steadily to £9.00 an hour by 2020 (Rex)

It could encourage further EU migration to Britain

The UK currently has a minimum wage of £6.50 per hour. This figure is broadly equivalent to the minimum wage both in France (£6.89) and Germany (£6.10). But from next April the UK’s minimum wage will rise to £7.20 and then go up steadily to £9.00 an hour by 2020.

This has the potential to make the UK the most attractive destination for low paid workers in Europe – especially to those from Eastern European countries who might have otherwise have gone to other major economies. Reductions to tax credits may go some way towards off-setting this but many European migrants to the UK are not claiming these anyway.

Your 25th birthday could become a cliff-edge to unemployment

The minimum wage rate of £6.50 currently kicks in at the age of 21 but the new living wage will only apply to the over 25s. Given much low paid work is in the hospitality and retail sectors many employers are likely to try and ‘game’ the system by employing younger staff and then off-loading them when they become more expensive. While this would be illegal it would also be hard to prove and Government changes mean that a worker would have to pay over £1,000 to make a claim of unfair dismissal at an employment tribunal – well out of the reach of the lowest paid.

Pay rises will be harder to come by

Employers facing a steep rise in their wage bill will face a choice: Take a hit on profits; charge more; or restrict the wage bill on employees earning more than the new legal minimum.

If they charge more for their good and services companies risk losing business and none will want to take a hit on profits. What is more likely is that pay rises above the new minimum will be much harder to come by - potentially disincentivising the workforce and lowering productivity. Companies may also offer less generous pension contributions, fewer staff discounts and a reduction in other ad hoc perks.

Unemployment could go up

The alternative to the above is for companies to simply employ fewer people to do the same job. Thus expect to see more automated tills in supermarkets, longer queues in pubs and slower service in restaurants. The Office of Budget Responsibility estimates that the new minimum wage will result in a reduction of average hours worked as well as leaving 60,000 fewer people in employment. However they say this will be more that off-set by new jobs created.

But such predictions are not an exact science. David Cameron warned at the election that a Labour Government would cost a million jobs through new taxes on business. He could be making the same mistake.

It will exacerbate the crisis in social care

Social Care is one of the lowest paid sectors in the economy – and one that is under most pressure from Government cuts to local council budgets.

According to Care England, which represents care home providers, local authorities are paying about £395 a week per resident, equating to about £2.35 an hour for accommodation, meals and care. Research by LaingBuisson in 2013 found average council fees remain between £31 and £130 a week below the minimum calculated as necessary to make care homes financially viable.

Unless the Government wants to see more care home groups go to the wall like Southern Cross or prevent potentially dangerous cost cutting in other areas the Government will need to address this care home funding before the living wage comes into effect.