Labour could slow youth wage rises as jobs crisis deepens

Million young people need opportunities – but can small firms afford them?

Nearly one million young people are reportedly out of work or missing out on education and training, while the small businesses that traditionally give them their first job are finding them increasingly expensive to employ. Now ministers are considering slowing planned minimum wage increases for younger workers. It's a politically difficult rethink, but it raises a question small employers have been asking for some time: have we made entry-level jobs too expensive to create?

MINIMUM WAGE RETHINK?

Could slowing youth pay rises help small businesses hire again?

The Government is reported to be considering easing youth wage increases as nearly one million young people are out of work or missing out on training or education. Ministers are weighing up whether to slow planned minimum wage rises for young workers, because of worries that rapid increases have made entry‑level jobs too expensive for employers; especially small and micro businesses.

Downing Street and the Treasury are reviewing whether the sharp jump in youth wages has contributed to our youth jobs crisis. A major review into worklessness is due in the next few weeks.

This is firmly in the realms of speculation for now but if it does come to pass, this would mark a shift from Labour’s 2024 manifesto pledge to remove “discriminatory” age bands and bring younger workers onto the full adult rate. It seems though that the ambition isn’t to be dumped completely but just take longer to achieve, to give businesses a bit more breathing space.

The Numbers

This year the minimum wages are set to go up:

• 21+ rate: up 4.1% to £12.71

• 18–20 rate: up 8.5% to £10.85

• 16–17 rate: up 6% to £8

The gap between youth and adult wages has narrowed quickly just when small businesses are struggling with rising costs, falling demand, and tighter margins. Ministers are now asking whether the pace of change has unintentionally made entry‑level hiring harder. Small and micro businesses have been telling minister this for quite a long time.

Inexperience

For small employers, especially in hospitality and retail, young workers are essential, but rising wages for those young people have coincided with higher employer NI, rising energy bills, insurance cover, and borrowing costs. At the same time consumers and customers have less money to spend and demand is down. Many small firms say they simply cannot afford to take on inexperienced staff at higher rates.

Given that it takes time for inexperienced workers to become productive and contribute to the business revenue, many employers who can afford to hire are taking on experienced workers instead. Take means they avoid training costs. This isn’t about refusing to pay fairly but about keeping the business afloat.

The Reality

Small businesses report:

Fewer entry‑level roles: When labour costs rise faster than revenue, micro‑firms cut junior roles first.

Reduced hours for younger workers: Higher hourly rates mean fewer shifts.

Seasonal employers are struggling: Coastal, rural and tourism‑dependent businesses say youth wage rises hit them hardest.

Youth unemployment is rising and nearly 1 million young people are looking for opportunities, which is the highest level in years.

This is what’s driving the Government’s possible rethink.

The Dutch Model

UK officials are studying the Netherlands, where youth wages fall sharply with age:

• 21+: €14.99

• 18: €7.50

• 15: €4.50

Around three quarters of Dutch 15–29‑year‑olds work while studying and that’s the highest in the EU. Only 4.8% of young people there are out of work or education, and employers hire young people easily because entry‑level labour is affordable.

Alan Milburn, the former government minister who is leading the UK’s youth worklessness review, went to the Netherlands recently and said recommendations could include slowing or even reversing youth wage increases. So far in his review he has said: “We need to make it as easy as possible for companies to employ young people.”

A Tension

The Low Pay commission isn’t convinced however and says it hasn’t seen “robust evidence” that higher youth wages alone caused deteriorating employment.

This leaves the Government with a delicate balancing act. Ministers are determined to make work pay, make hiring affordable and reduce youth unemployment. However, if they don’t protect small and micro businesses there will be many fewer jobs available for the young workers who need them.

Labour’s manifesto didn’t set a deadline for equalising youth and adult wages and that give the Government room to slow the process without breaking the pledge.

If youth wage rises slow down, small businesses could see lower hiring costs, more flexibility in staffing, less pressure on payroll and more young people available for work.

Small businesses will also watch closely for any tax rises. If the Treasury slows wage rises but increases other business costs, the benefit disappears.

The Tightrope

The UK economy needs young people in work. We can’t afford to have a generation out of work and not contributing. Small businesses need to be able to afford to take on young people in entry level jobs, and young workers need fair pay and real opportunities. Slowing youth minimum wage rises won’t solve the crisis alone, given that automation and AI is being used to cut costs, but it could help small businesses start taking on young people again, rebuild entry‑level roles, and give young people a way back into the labour market.

The Government is walking a tightrope. The next set of decisions will determine whether youth unemployment falls, or small businesses continue to struggle to hire the next generation.