Freeze the wage, free the young

The government is always asking business to do more. Whether it is demanding that supermarkets cap prices, requiring companies to report non-financial metrics, or simply insisting that businesses “help improve society”, governments of all stripes are remarkably fond of putting the onus on industry. 

This is perhaps clearest in the labour market. “Why are businesses not doing more to hire young people and help them onto the career ladder?”, Westminster asks. Yet the same governments keep increasing the cost of employing people, seemingly oblivious to the possibility that their own policies might have something to do with youth unemployment. 

In recent years there has been a continuous increase in 16-24-year-olds that are not in employment, education, or training — otherwise known as NEETs. The number of NEETs has increased from 715,000 in 2021 to 946,000 last year, signalling that the door to entry-level jobs has been steadily closing on young people seeking employment. There is naturally a plethora of reasons as to why this figure has increased so substantially over the course of the past few years, but one of vital importance is simply the growing cost of employing people with little experience to offer. 

As of April 2026, the minimum cost of hiring a new full-time equivalent employee in Britain is £28,308.52

Since 2019, the National Living Wage (NLW) has risen by 48 per cent, whilst output per hour has increased by a meagre 2.9 per cent. As of April 2026, the minimum cost of hiring a new full-time equivalent employee in Britain is £28,308.52. Businesses cannot absorb the continuous price hikes of labour whilst the economy remains stagnant.

For a large corporation, increases to the minimum wage can be an irritation, but their large size can allow them to swallow the cost. For other businesses, both SMEs and particularly those in  the hospitality industry — which operate on much smaller margins and a far more sensitive to cost changes — it can be the difference between hiring an additional pair of hands or struggling on with the staff already employed. 

Often the first people to lose out are those gunning for entry-level positions; those with the least experience. Somehow, we have arrived at the bizarre point where young people are encouraged to gain “experience” before they can get a salaried job. This can be seen from Sainsbury’s new “Modern Work Experience Programme”. Launching this month, the supermarket chain will offer around 10,000 work experience opportunities to help people who may otherwise “struggle to access employer networks, work experience and career opportunities”. Sainsbury’s scheme itself is laudable, but one does wonder whether the overwhelming support given to it by Burnham is a case of applauding the fireman whilst ignoring the arsonist.

Traditionally, the British labour market allowed people to learn on the job, demonstrate their worth before rising through the ranks, gaining promotion or progressing on to better-paid work. But when the statutory wage floor rises too quickly, employers have less wiggle room to take a chance on someone who has not yet learnt the ropes. 

Of course, this is in no way an argument that those looking for jobs that offer the NLW deserve poverty wages. But the current government-imposed wage floor hinders businesses from employing labour that produces value beneath the state-set rate of £12.71 per hour. 

Employing people is one thing, but wage compression is also a longer-term consequence. As minimum wages increase disproportionately, employers often face pressure to raise pay further up the ladder to preserve a difference between junior recruits and more experienced staff. This can be a considerable expense: think of your local pub attempting to give a supervisor a pay rise when the new bartender is already starting on a wage not far below theirs. The supervisor has several more responsibilities, such as managing staff and dealing with difficult customers, yet the financial reward for doing so is steadily shrinking. The landlord must either find the money to offer a more appealing salary or accept that the incentive to take on more responsibility is becoming less attractive.

This is the issue that Dr Emmanuel Igwe and I seek to examine in the Prosperity Institute’s latest paper, “The Case for Freezing the National Living Wage”. As is intimated by the title, we propose freezing the NLW at £12.71 an hour for a period of five years, rather than continuing to uprate it. Importantly, there would be no cut to workers’ nominal wages. Assuming median earnings growth of 3.5 per cent annually, the minimum wage’s bite ratio — that is, its level relative to median earnings — would fall to about 56 per cent, close to where it stood in 2018. 

We have found that this could lead up to 597,000 additional jobs. Naturally these are estimates, not guarantees, but our findings do suggest that allowing the bite ratio to fall could make a substantial difference to employment prospects. 

A freeze alone, however, would not be enough to liberate Britain’s labour market. Employer National Insurance contributions should be returned to their pre-April 2025 levels, reducing the effective tax penalty to hiring. The Employment Rights Act 2025 should be reconsidered where additional obligations increase the risks and costs of recruitment, especially for smaller firms.

The rather large elephant in the room is the fact that politicians have become accustomed to treating every increase in the minimum wage as a comms exercise to prove their commitment to “working” people. Freezing would entail considerable level of political risk and potential loss of political capital, but this should be weighed against the gains — both real and political — of making it easier for businesses to hire and getting more young people into work.