The United Kingdom’s minimum wage now stands as the most generous among the world’s major economies — but a growing chorus of voices, including former supporters, is warning that it may have become too high. The rate for workers aged 21 and over, known as the national living wage, is now set at two-thirds of median earnings, a level unmatched by comparable nations. Yet this achievement coincides with worsening youth unemployment and a landmark report warning of a “lost generation” of young people neither in work nor education.
The current debate: a policy under pressure
Tony Blair, whose New Labour government introduced the national minimum wage in 1999, has argued that recent increases have created headwinds for businesses. Within Labour, a split has opened between those who want to slow the pace of rises and those eager to press ahead with further increases and the convergence of youth rates towards the adult level, according to The Guardian. Meanwhile, Alan Milburn’s interim report on “Neets” — young people not in employment, education or training — has sharpened concerns that the UK’s relatively generous minimum wage is damaging overall employment, particularly among young workers.
The political landscape has shifted further with a proposal from former prime minister Rishi Sunak. Writing in The Sunday Times, Sunak called for the abolition of the Low Pay Commission, arguing that ministers should have direct control and accountability over setting the national living wage. He admitted that his past decisions to hike the minimum wage had backfired and contributed to job struggles for young people, stating he wished he had been “braver” in overruling Low Pay Commission recommendations when wage increases outstripped productivity gains. He also suggested freezing rates until 2030 and linking the national living wage to productivity.
The rates: how we got here
The national minimum wage was introduced on 1 April 1999 at an adult rate of £3.60 per hour for those aged 22 and over, and £3.00 for 18- to 21-year-olds. Since then, it has risen dramatically in both cash and inflation-adjusted terms. In April of this year, the minimum wage for all workers aged 21 and over rose 4.1% to £12.71 an hour — the national living wage. That rate tracks two-thirds of median earnings, a target introduced by the Conservatives in 2019. The rate for 18- to 20-year-olds jumped 8.5% to £10.85, while the rate for 16- to 17-year-olds and apprentices rose 6% to £8.00.
These bigger increases for younger workers stem from the government’s aim of gradually levelling up youth rates to a single adult tier — a continuation of Conservative policy. In 2016, the Tories created the national living wage tier for those aged 25 and over at £7.20 per hour. Subsequent governments then cut the age requirement for that top tier: to 23 in 2021 and down to the current age of 21 in 2024 — all the while increasing the headline rate. The Low Pay Commission’s target for the national living wage was to reach approximately two-thirds of median earnings; in April 2024 and April 2025, it reached 65%, slightly short of the 66% target.
About 1.7 million people now earn the national living wage, or about 6% of the workforce aged 21 and over — roughly twice as many as when the national minimum was introduced in 1999. Among workers under 21, the proportion is far higher, at about a fifth. In total, an estimated 2.0 million workers were paid at or below the minimum wage in 2025, approximately 6.6% of all UK workers.
The economic arguments: from consensus to counter-revolution
MoneyWeek has long been in favour of the minimum wage on the grounds that taxpayers should not subsidise corporate profits through tax credits for the working poor. The higher the wages, the fewer the benefits that have to be paid out. Other arguments in favour centre on social justice: income distribution has become more skewed towards the rich, increasing inequality and potentially undermining the social solidarity that makes capitalism sustainable in the long run. Some economists also argue that minimum wages boost productivity, particularly in the service sector, though the evidence is contested.
Orthodox economic theory suggests that compulsory high pay levels will destroy jobs by disincentivising firms from taking on workers. But the history of minimum wages since the 1990s has been far more encouraging. Landmark US research on fast-food pay rates by economists David Card and Alan Krueger in 1994 shifted the academic debate, finding that a minimum wage did little to dampen employment. By the early 2000s, the literature indicated that a 1% increase in wages due to a higher minimum wage would lead to a 0.5% decline in employment. “By the late 2010s the effect had fallen to around zero,” says The Economist. The politics changed, too: as the UK’s national minimum was gradually increased without causing unemployment to grow, the Conservatives dropped their initial opposition and backed the policy.
But the core issue now is that the rate has jumped so high. The UK has leapt from being relatively cautious — with the minimum wage at 45% of median earnings in 1999 — to being the most generous of all the big economies at 67%. Most of the UK’s historical experience and evidence relates to a period of low interest rates, low inflation and low unemployment, with a minimum wage at around 45% to 55% of median earnings, not 67%. That jump, combined with today’s worsening macroeconomic picture, makes it far harder to be sanguine about the wage’s effect on job creation in future. At the same time, there has been a counter-revolution among economists. Several influential US studies from 2022 onwards found that higher minimum wages — a phenomenon seen across many developed economies over the past 25 years — have indeed hit job levels, damaging the employment, income and overall welfare of precisely the low-income workers they are meant to help.
Youth unemployment: the growing evidence of harm
The most vulnerable group in this picture is young workers. In July to September 2025, the UK’s youth unemployment rate for 15- to 24-year-olds stood at 15.3%, slightly higher than the EU average of 15.2%. This was the first time since comparable OECD records began in 2005 that the UK’s rate was higher than the EU average. By January to March 2026, the unemployment rate for 16- to 24-year-olds hit 16.2%, up from 14.2% the previous year, with 729,000 young people out of work.
The rise in Neets — young people not in employment, education or training — is particularly stark. Alan Milburn’s interim report, published in May 2026, found that at the end of 2025 approximately 957,000 young people were Neet. By January to March 2026, that figure rose to an estimated 1,012,000 young people aged 16 to 24. Milburn described this as a “record of failure” and warned of a “lost generation”. Ill health, particularly mental health problems, is identified as a primary driver: nearly half of young people who were Neet in 2024-25 reported having a disability, up from 21.1% in 2013-14, with mental health issues the principal driver of the increase. Other contributing factors include rising employment costs and a decline in “Saturday jobs”. The economic cost of youth unemployment and Neets is estimated at around £125 billion per year.
The connection to minimum wage policy is hard to ignore. The fall in both vacancies and payroll numbers is concentrated in retail and hospitality — sectors where a third of all minimum-wage jobs are located and which account for almost half of all jobs held by under-25s. Pay in these sectors saw an “unprecedented” 18% increase in the past year ahead of April’s minimum wage rises, but employment growth has slowed. “Shamefully, and in a reversal of the historical norm, we now have higher youth unemployment than the EU average,” the original analysis notes. “And at least in part, that’s because we are knowingly pricing young workers out of the labour market.” Larger increases for younger workers — the 8.5% jump for 18- to 20-year-olds and the 6% rise for 16- to 17-year-olds — reflect the policy of levelling up youth rates, but they also risk making young workers more expensive relative to their productivity.
Research on the national minimum wage in the UK suggests that it led to increases in labour costs for low-paying firms, but those may have been met by increases in labour productivity through total factor productivity gains, efficiency wage responses and training. However, some studies found negative profit effects concentrated among low-paying small and medium-sized enterprises. There is a risk that increasing youth minimum wage rates may have a negative effect on youth employment in the future — a risk that current data suggests is materialising.
What can be done? Proposals and pitfalls
A sensible start, according to Sunak’s analysis, would be to freeze the rates for the rest of this parliament and take back control of setting the rates from the Low Pay Commission. Future rises should be linked to gains in productivity — the national living wage is up by almost a third in real terms over the past decade, while productivity has only increased by 6%. That gap is widely seen as unsustainable.
Productivity growth has indeed been a persistent concern. From 2010 to 2024, output per job grew by an average of just 0.58% per year, compared with 1.9% per year from 1997 to 2007. This slower growth means the UK’s gross domestic product is estimated to be 21% lower than it would have been if historic growth rates had continued. Recent data shows some volatility: in the year to the third quarter of 2025, productivity showed modest growth of 1.1% using Labour Force Survey data, but a more significant 3.1% growth when using Pay As You Earn Real Time Information data, suggesting a possible pick-up not fully captured by traditional measures. Manufacturing has historically shown stronger labour productivity growth than services, though it has stagnated since 2008.
The sectoral impact of further wage rises is uneven. Retail and hospitality are the most exposed, but social care providers — often funded by fixed government contracts — face squeezed budgets that could lead to staff shortages or service cuts. Entry-level roles in warehousing and logistics are also often paid close to the minimum wage, and firms may respond to increases by investing in automation. The Low Pay Commission, established in 1997 to advise the government on rates, currently sets its recommendations independently, and governments have generally accepted them, but its remit is set by the government. Removing that independent layer, as Sunak proposes, would give ministers direct accountability but also remove a buffer against political pressure.
The original article notes that the UK’s historical experience with minimum wage policy offers limited guidance for today’s conditions: most evidence comes from a period when the minimum wage stood at 45% to 55% of median earnings, not 67%, and when the economic backdrop was far more benign. The worsening macroeconomic picture, combined with the academic counter-revolution showing that high minimum wages can indeed destroy jobs, makes the current trajectory precarious. The fall in both vacancies and payroll numbers concentrated in retail and hospitality — where a third of all minimum-wage jobs are and which account for almost half of all jobs held by under-25s — suggests the damage is already underway.
