How the national minimum wage became a thorn in Britain’s side

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As they gathered in the heart of Westminster to celebrate 25 years of the minimum wage, not all executives were in a festive mood.

Just before the cutting of the birthday cake – covered in white icing and featuring five balloons – Rain Newton-Smith, head of the Confederation of British Industry (CBI), declared that more companies than ever are worried about the rising rate.

Next week, the figure will jump by £1.02 to £11.44 an hour.

“We will have ended relative low pay, but with more people feeling low paid than ever before,” Newton-Smith said. “That’s what happens when you focus on minimum wages without driving growth.”

It’s not quite the “happy birthday” toast which supporters of the policy would have wanted.

The Resolution Foundation, the think tank which hosted the birthday party on Wednesday night, said the introduction of the minimum wage in April 1999 marked the start of the “single most successful economic policy in a generation”, raising pay for millions by £6,000 a year.

CBI head Rain Newton-Smith said the economy was a ‘different beast’ when the minimum wage was created – Carlos Jasso/Bloomberg

But many are now questioning whether it has gone too far. Newton-Smith spoke for many in the room last night when she argued that what worked well in the 90s doesn’t necessarily suit 2024.

“I don’t need to tell you how different the world was when the Minimum Wage Act was passed in July ‘98. Blur had just headlined Glastonbury. The Truman Show had just hit cinemas. And I was a fresh-faced student of economics and philosophy at university,” she told guests.

“The economy I was studying there was a very different beast. For 1998 as a whole, growth was 3.4pc. That’s higher than the US last year. Inflation, too, was at just 1.6pc. Compare that to today. In January, GDP fell by 0.3pc on the year. Meanwhile, inflation is still high at 3.4[pc].”

Her conclusion, that pay rises could further stoke inflation and so the focus needs to be on improving the economy instead, has followed months of conversations with bosses.

Increasing the minimum wage by £1 an hour, the biggest cash rise to take place since the legislation was introduced, has created a strain so great that nearly half of the CBI’s members have had to increase prices for consumers as a result.

Smaller businesses such as nurseries have also been forced to put up their fees, with parents told in recent months that they have to pay more from May as wages make up around 80pc of nursery costs.

Business leaders are angry.

The heads of retailers Next, Timpson and Currys, as well as nightlife operator Revolution Bars, are among those who have publicly hit out at the Government over April’s wage uplift.

Alex Baldock, chief executive of Currys, has argued that pushing up the minimum wage while also increasing business rates and plotting new recycling legislation shows how little the Government seems to care about his industry.

James Reed, the boss of recruitment giant Reed, has said that April’s rise will force employers to cut staff or scale back hours.

The UK now has one of the highest minimum wages in the world relative to typical wages, and economists fear unintended consequences if it keeps on rising.

Tony Wilson, the director of the Institute for Employment Studies, says there will “inevitably be a point where a high minimum wage will start to destroy jobs, but we don’t know whether that point is now”.

He says research doesn’t suggest that it will at this stage – more likely is that the country will suffer a “squeezing of the balloon effect” where a higher minimum wage won’t necessarily equate to an increase in income if under-pressure companies just adapt by slashing hours, hiring fewer staff or offering less job security.

That could impact women and young people in particular, with retail and hospitality the most likely industries to feel the pinch.

At the moment, however, most companies are struggling to just fill good jobs. Families across the country are finding it impossible to keep up with their rising bills.

Wilson believes getting more people into work needs to be the focus first. “There are a lot of jobs out there,” he says. “Getting people into better-paid and productive work has got to be the priority.”

Many bosses fear the months ahead. Neil Carberry, chief executive of the Recruitment and Employment Confederation (REC), says businesses are concerned that politicians on both sides of the political spectrum will keep hiking up the minimum wage for votes until “it’s too late” and the damage is done.

He believes April’s rise is “really out of step with both price and wage inflation”, and could especially hit small businesses relying on part-timers in rural and coastal towns.

“Price rises and other coping mechanisms – like shorter opening hours and shift changes – will need to happen,” he says. “It is always worth remembering that the firms exposed to national minimum wage are consumer-facing and hardest hit by the pandemic.”

A quarter of a century in, the minimum wage has clearly come of age. But as for many adults, its birthday celebrations may become increasingly muted affairs.

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