The question arises: Should businesses compensate employees based on their work output or to alleviate escalating expenses like rent and energy? The government has revised the Low Pay Commission’s (LPC) mandate, now requiring it to account for living costs and inflation when determining minimum wage levels for employers. Essentially, this reform positions Labour to direct the commission to ensure that businesses pay wages sufficient to cover workers’ personal financial obligations—costs that are largely beyond company control.

This transformation in the minimum wage’s purpose began in 2015, when the LPC approached the wage floor with caution, aiming to prevent an increase in unemployment. Following several years of minimal impact on job rates from rising wages, political figures adopted a more assertive stance. That year, George Osborne’s budget outlined plans to elevate the minimum wage to a significant 60 percent of median earnings, subsequently re-branded as the “national living wage” for individuals over the age of 25. Later, the Conservatives enlisted the expertise of a progressive American academic who suggested that the wage could be pushed to 66 percent without triggering job losses.

Osborne’s rebranding contributed to a more lenient perspective on employment, reinforcing the belief that the minimum wage should cover living expenses, rather than simply establishing a sustainable wage floor for businesses. With inflation hitting low-paid workers hard in recent times, Labour’s tasking of the LPC to ensure businesses absorb these costs during inflationary periods seemed nearly unavoidable.

In the short term, given that inflation has now dropped below 2 percent, it is improbable that this added responsibility will significantly alter the LPC’s forthcoming recommendations. Nonetheless, economists express concerns that this requirement could progressively elevate the minimum wage during downturns, potentially leading to increased unemployment.

Consider the implications of a sudden shock in oil or gas prices. Former government economist Tim Leunig points out that with Labour’s updated guidelines, the LPC would advocate for raising the minimum wage to safeguard low-wage workers from surging prices. However, should businesses already be grappling with escalating fuel costs, raising wages concurrently might compel them to reduce workforce size or cut hours, resulting in higher unemployment or underemployment rates.

A significant reason that earlier minimum wage increases did not precipitate widespread job losses has been the inherent flexibility of the UK labor market, allowing businesses to adapt in various ways. Research from the London School of Economics highlighted that some companies utilized zero-hours contracts to navigate rising expenses, while others opted to prune benefits or exclusively hire experienced staff. Moreover, some firms increased employee monitoring to enhance productivity.

However, Labour’s Employment Rights Bill complicates these adaptive measures, introducing new employee rights from day one and restricting zero-hours contracts. It also curtails businesses’ capabilities to decline flexible work requests. By limiting how companies can respond to climbing wage costs, Labour may inadvertently elevate the likelihood of firms resorting to layoffs, halting hiring processes, or turning to automation as the minimum wage ascends.

Adding to the challenges, Labour is contemplating an increase in employer national insurance contributions in the upcoming budget. Businesses weigh the overall expense of employment against the value provided by their workers. Should employer taxes rise, firms might mitigate wage growth to manage their finances. However, for low-paid employees facing mounting minimum wage pressures, such flexibility will be lost, leading to diminished job prospects for younger and unskilled workers. Additionally, Labour’s plan to eliminate youth minimum wage rates will exacerbate the costs associated with hiring younger candidates, particularly as opportunities for entry-level positions continue to dwindle.

This situation does not imply that the government should overlook elevated living costs. Instead of mandating that employers of low-paid workers provide them financial relief, Labour ought to concentrate on initiatives aimed at reducing living expenses—such as reforming planning regulations to alleviate the housing crisis and decreasing energy costs. While prior wage increases have not resulted in the job losses that economists forecasted, advancing wage rates without considering businesses’ financial capabilities, while concurrently restricting their adaptability, could transform future raises into job destroyers.

Ryan Bourne is an economist at the Cato Institute and serves as the editor of the book The War On Prices.