Daniel Herring is Researcher for Fiscal and Economic Policy at the Centre Policy Studies.

Among many announcements in the Budget last week, was the fact that the minimum wage was rising in line with inflation, from £12.71 to £13.21 per hour.

No one should begrudge low paid workers a modest pay rise, but they are not the only ones affected. Every increase in a worker’s salary is an increase in the cost of employing that person.

In recent years, successive governments have – for political reasons, as much as economic ones – welcomed the Low Pay Commission’s decision to recommend inflation-busted increases to the minimum wage. Analysis I’ve published at the Centre for Policy Studies found that thanks to minimum wage rising and Rachel Reeves’ decision to increase employer’s national insurance, since Labour have come to office the annual cost of employing a full-time minimum wage worker (35 hours per week, 52 weeks per year) has risen from £22,438 to £26,900. This is an increase of 20%, almost twice as fast as inflation over the same period at just 10.1%.

Not only is this putting pressure on employers, but this is also increasing wage compression, with the difference between lowest paid and those on an average salary decreasing. With Labour continuing Rishi Sunak’s decision to freeze income tax thresholds, a full-time minimum wage earner in 2027 will be more than halfway to paying the higher rate of income tax – in 2000, it was one fifth. Those without the skills and experience to be considered for low paid work now it costs more than ever suffer for lack of opportunity and the slightly higher paid begin to feel as though their efforts are not worth it. Why take on a role with much more responsibility if the salary is only a little above the minimum wage anyway? This is a phenomenon we see often in social care, where lower level managerial roles with significantly more responsibility are paid only pence an hour more than entry-level roles, because the floor has risen significantly and budgets are tight.

Graduates in particular have a right to feel aggrieved. Tuition fee loans are sold to prospective students on the basis that education leads them to better paid work, but someone who started studying in September 2023 and graduated from a three-year degree this last summer will start repaying their loan once annual earnings tick over £25,000. Repaying a student loan on a full time minimum wage salary doesn’t sound like much of a graduate premium.

The minimum wage was introduced by Tony Blair, but the real rise in costs began in 2015 when the Conservative government promised to increase the minimum wage to 60% of median earnings (and later to two thirds). Since 2015, the minimum wage, and the cost of minimum wage labour, has risen faster than both inflation and the average wage. The UK has the seventh highest minimum wage in the OECD for countries which have a minimum wage (relative to median wages). Had it remained at the 2015 level, it would be the tenth lowest.

Of course, Labour made it worse by increasing the rate and lowering the threshold of Employer’s National Insurance – an employer pays 77% more national insurance than they did in 2024.

Economic theory suggests that a rise in employment costs above a market rate will lead to a loss of employment. In reality, the evidence is mixed on the effects of raising the minimum wage, and this is an area where many studies have argued that modest minimum wages and modest increases do not significantly affect labour supply.

Many studies have trouble pinpointing the minimum wage as a reason for youth unemployment in the recent past. Of course, there are lots of other candidates for rising unemployment (particularly for young people) besides rises in the minimum wage and employer NI. AI, the welfare system, poor mental health, high energy prices and general economic stagnation have all contributed to a reduction in the number of job vacancies. When looking at youth unemployment specifically, it’s definitely not the case that the minimum wage is the only, or even the main thing, stopping employers from hiring.

But it is a factor. In fact, you could argue that all the other factors – being politically tricky to solve, like the welfare system, or nebulous and uncertain, in the case of AI – make reducing the cost of labour for employers even more important. The Low Pay Commission acknowledged that many employers are struggling with bills and that many young people are looking for work. The government should not be heaping additional costs on them via employment taxes or the minimum wage when they are already struggling with spiralling energy bills. This point has been half acknowledged by the Low Pay Commission and by the Chancellor, who at last month’s Budget chose to slow down the rate of increase for the 18–20-year-old rate.

So, what should the right do? Firstly, there is a strong argument that the minimum wage should be frozen for a parliamentary term, or until it reaches some reasonable proportion of median wages. This provides breathing space for businesses and opportunities for young people, many of whom need experience more than extra money.

Secondly, everything needs to be about economic growth. While the minimum wage can have its place, general prosperity can only be delivered through real per capita economic growth. The Conservative governments from 2010 to 2024 were obsessed with redistribution and protecting incomes at bottom end. Aspiring to help the worst off is good, but we – the taxpayer and private enterprise – are running out of money. The only way to help everyone achieve higher incomes sustainably is economic growth. The minimum wage can only ever be secondary to that.