Incredibly, while the Government was trying to lower retailers’ costs to keep them in business, it also went ahead in April with a 6pc real terms increase in the national living wage (NLW), to £8.72 per hour. This raised underlying wage bills just as businesses faced forced closures and demand downturns, the duration and longer-term effects of which are unclear.
This hike followed other large increases since this NLW was introduced in 2015. Prior to that the Low Pay Commission (LPC) advised on the minimum wage level, keeping a keen eye on preventing job losses and ensuring firms could afford it.
But George Osborne’s NLW overhaul replaced this framework with an arbitrary target: for the NLW to reach 60pc of median earnings by this year. That aim, for the first time, was completely divorced from companies’ ability to pay. Now we will feel the consequences.
Minimum wages fixed above market rates reduce demand for lower-paid workers. But while we had the highest employment on record and 795,000 vacancies, those consequences were likely delayed or hidden. In a sharp downturn, this dynamic changes. A sharp cycle of firm deaths and births will likely follow when subsidies are removed and the economy adjusts to new demand and supply patterns.
New businesses will be much more conscious of payroll costs and consider adoption of labour-saving technologies. When the US minimum wage was raised during the last recession, economists Jeffrey Clemens and Michael Wither found that states where the federal minimum increase resulted in higher mandated wages saw “significant, negative effects on the employment and income growth of targeted workers”.
Until an effective vaccine has been rolled out, evidence from surveys suggests consumers will visit cinemas, shopping centres, or large social events, less often. Consumer-facing businesses might also be compelled to adopt safety protocols, including personal protective equipment, regular disinfecting, or spacing tables, patrons, or workers to ensure social distancing.