November 28, 2016

OECD urges caution over living wage increase

The OECD warns that the UK should be careful with its plans to raise the National Living Wage, given its possible impact on employment.

In the UK’s recent Autumn Statement, Chancellor Philip Hammond pledged to raise the wage to £7.50 an hour next April. The OECD also forecast that the UK would have one of the lowest growth rates among the G20 countries by 2018.

The National Living Wage came into effect in April this year, and was set at a rate of £7.20 an hour for workers aged 25 and over, with plans to increase it to £9 by 2020. The UK’s Office for Budget Responsibility estimates it would give a pay rise to 1.3 million workers this year.

The OECD said that the UK’s labor market had been “resilient” although job creation has been moderated recently.

“Real wages have been growing at a time of low inflation, but the fall of the exchange rate has started to increase prices pressures,” it said.

“The effects on employment need to be carefully assessed before any further [wage] increases are adopted, especially as growth slows and labour markets weaken.”

The OECD predicts that the UK’s economy will grow by 1% in 2018, slower than both Germany (1.7%) and France (1.6%). The organization warned that the UK’s unemployment rate could rise to more than 5% because of weaker growth.

David Neumark, writing on the effects of minimum wages, says that, “a higher minimum wage discourages employers from using the very low-wage, low-skill workers that minimum wages are intended to help. A large body of evidence confirms that minimum wages reduce employment among low-wage, low-skill workers.”

Read the presentation from the OECD.

Related articles:
The effects of minimum wages, by David Neumark
Do labor costs affect companies demand for labor? by Daniel S. Hamermesh
Do minimum wages stimulate productivity and growth? by Joseph J. Sabia

See also our articles on minimum wages