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The body that advises the government on pay rates has defended last year’s minimum wage increase, saying it had a minimal impact on inflation and did not cause a significant, economy-wide reduction in employment – but has issued a stark warning that this week’s fresh rise lands at a moment of acute economic fragility.
The Low Pay Commission published its analysis on Wednesday, concluding that Chancellor Rachel Reeves’s decision to raise the national living wage by 6.7% in April 2025 made only a small difference to the overall wage bill despite widespread business warnings that entry-level positions were being cut. Even in hospitality – the sector most visibly affected by the increase – the LPC noted that employment among 18- to 20-year-olds remained considerably higher than pre-pandemic levels.
But the reassurance comes with a significant caveat: the new 4.1% rise that takes effect this week does so against a backdrop that has materially worsened since the previous increase was decided.
What the Low Pay Commission found
The LPC’s analysis was broadly positive about the impact of the 2025 increase – but carefully qualified. The Commission acknowledged that two issues complicated its assessment significantly.
The rise in employer National Insurance contributions happened at exactly the same time as the minimum wage increase in April 2025, making it genuinely difficult to separate the employment impact of the wage floor increase from the effect of higher payroll taxes. Businesses facing both simultaneously had strong incentives to cut costs – but attributing job losses or price rises specifically to the minimum wage, rather than the NI changes, is analytically challenging.
On youth employment, the picture is more nuanced. The LPC found there was no sufficient evidence that minimum wage increases had affected young people’s employment overall at the economy-wide level – but acknowledged explicitly that the youth labour market is in a worrying state. The Commission noted there has been a concerning rise in the rate of young people not in education, employment or training, and that young people are more likely to work in hospitality and retail, which have seen significant falls in vacancies and employee numbers.
In practice, the LPC acknowledged it is difficult to separate the minimum wage effect from other pressures including consumer spending, NI changes and monetary policy – which is, in effect, an admission that the clean reassurance the headline finding offers is harder to rely on than it appears.
This week’s rise and why the timing is difficult
The 4.1% increase that comes into effect from 1 April takes the adult national living wage – the rate for workers aged 21 and over – from £12.21 to £12.71 per hour. The minimum wage for 18- to 20-year-olds rises to £10.85, an increase of 8.5%, while the rate for 16- to 17-year-olds increases to £8.00 per hour.
The LPC’s recommended rate is intended to meet the government’s ambition for the national living wage to reach at least two-thirds of median earnings – an internationally recognised threshold for low pay. The Commission has already estimated that a further 3.7% increase to £13.18 will be needed in 2027 to maintain that benchmark.
For around 1.7 million workers, the rise represents a genuine real-terms pay increase that should modestly outpace inflation. Reeves has presented it as one of the key measures helping families cope with the rising cost of living.
But the timing could hardly be more uncomfortable. The new rates come into effect precisely as many small businesses simultaneously face sharply higher energy bills in the wake of the Iran war, still-elevated borrowing costs, and the ongoing absorption of last year’s £25 billion increase in employer NI contributions.
Anna Leach, chief economist at the Institute of Directors, said the new increase was “coming into effect at a really bad time,” as businesses grappled with that combined package of reforms and higher energy costs. The economic backdrop had been weak even before the Iran conflict, and “you could get quite a sharp increase in unemployment in this context,” she warned.
The youth unemployment concern
One of the most politically sensitive aspects of the minimum wage debate has been its interaction with youth unemployment – a metric that has been moving in the wrong direction.
Last month, ministers signalled they would slow future increases in youth minimum wage rates after the jobless rate among 16- to 24-year-olds rose above the Eurozone average and Bank of England policymakers put part of the blame explicitly on the government’s own policy decisions.
The Bank of England said last August that the minimum wage increase alone could have raised UK food prices by 1 to 2 per cent, with falls in payroll employment concentrated in low-wage sectors such as retail and hospitality – precisely the sectors that typically give young people their first foothold in the labour market.
The LPC’s own advice reflects this anxiety. The Commission debated whether to move 20-year-olds onto the full national living wage this year – which would have meant an increase of over 25% for that age group – but decided against it. In light of youth labour market conditions and stakeholder feedback, the Commission judged it better to take a cautious approach and opted for the 8.5% rise for 18- to 20-year-olds instead, while recommending that larger increases be backloaded into future years.
Business voices
The frustration from business – particularly in retail and hospitality – has been growing louder and more specific in recent months.
Stuart Machin, chief executive of Marks and Spencer, said last week that entry-level jobs were “being squeezed” because of what he described as government neglect of sectors central to youth employment. Politicians “distracted by flashier industries” had piled cost pressures – business rates, packaging taxes, energy tariffs, national insurance rises – on to retailers who are one of the primary entry points for young workers into the labour market.
“If we valued retail as the first rung on the jobs ladder, we would surely take a different approach,” he said.
Thomas Pugh, economist at audit firm RSM UK, said many small hospitality businesses had already cut opening hours in response to higher costs and felt they were “at the limits of what they can pass through” to customers. Further cost increases – even relatively modest ones – risked tipping marginal businesses into decisions to reduce headcount or close entirely.
The particular challenge facing the hospitality sector is the 8.5% increase in the youth rate. Hospitality businesses disproportionately employ young workers, and the scale of that increase – on top of already-elevated energy and ingredient costs – has concentrated pressure in a sector already operating on tight margins.
The bigger picture
The LPC’s analysis is careful and honest about its limits. It defends the 2025 increase while simultaneously acknowledging that the combined effect of wage increases and tax rises led employers in particular sectors to raise prices and cut jobs. It raises concern about youth unemployment while stopping short of attributing it definitively to the minimum wage. And it flags that the 2027 increase it is already projecting will require further significant rises in the wage floor.
What is clear is that the political consensus around minimum wage increases – once reliably popular with voters across the spectrum – is fraying at the edges. Employers in exposed sectors are increasingly vocal. Economists are raising concerns about timing. And the Bank of England has placed a portion of the blame for youth unemployment directly at the government’s door.
That does not mean the minimum wage rise is wrong in principle. Raising the wage floor for 1.7 million of the lowest-paid workers in the country is a meaningful intervention, particularly when energy bills are rising and the cost of living remains elevated. But the question of whether the pace, scale and timing of increases is being calibrated correctly – against a labour market that is already showing stress – is one that the government will find increasingly difficult to avoid.
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