The Adam Smith Institute has urged chancellor Philip Hammond to do away with the National Living Wage (NLW) which was introduced in April 2016, in favour of giving the Low Pay Commission full powers over the minimum wage.
Currently, only 5% of the UK workforce receives the minimum wage, though this figure is expected to see a sudden rise as the NLW increases to £9.02 over the course of the next three years.
The report claims that this increase has the potential to accelerate automation within the workforce, leading to a rise in unemployment and criminal behaviour. This in turn would increase consumer prices and hamper the progress of low skilled workers throughout their lives.
Businesses would have to find alternative ways to fund rising wages to protect their profits, meaning they could either hire fewer, higher skilled workers, invest in automation or outsourcing, or raise consumer prices.
According to the report, 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.
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 they saw a reduction in staff hours.
As a result of its findings, The Adam Smith Institute has called on the chancellor to abort the NLW in the Spring Budget and return power over the minimum wage to the Low Pay Commission.
It also recommends that increasing tax credits and introducing Negative Income Tax to boost incomes further but avoid rising unemployment and other unintended consequences would be of benefit.
Executive Director of the Adam Smith Institute, Sam Bowman, 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.”
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