The minimum wage is no longer affordable. Before any work has been done, an employer must commit £28,308.52 – the minimum amount of money required to cover a full-time national living wage salary, employer national insurance contributions and pension auto-enrolment. Many employers now can’t pay it. The result: our minimum wage laws have become a major driver of youth unemployment.

When Tony Blair’s New Labour introduced the minimum wage in 1999 – set at £3.60 for people above 22 years and £3.00 for workers aged 18–21 – it was 46 per cent of the median wage. At the time, Tory MPs such as Michael Fallon warned that a statutory minimum wage would add to public spending, damage competitiveness and discourage people from upskilling. Low-paid workers would become too expensive to hire and wage inflation would spiral.

The job losses did not come then, Tories seemed to change their minds and in 2005 David Cameron stated that the minimum wage ‘has been a success’. The sceptics were not wrong about the underlying economics, however; they only misjudged the scale.

We need to face the fact that the minimum wage is a blunt instrument to combat poverty

No market pressure arises when the minimum wage is significantly below median earnings. But at a certain point this begins to change. In 2015, then-chancellor of the exchequer George Osborne introduced the National Living Wage (NLW) for workers aged 25 and above, instructing the Low Pay Commission (LPC) to aim for a minimum wage matching 60 per cent of median earnings by 2020. More recently, the Labour party told its conference to ensure the living wage never falls below two-thirds of median wage.

Today, the ‘bite’ – that is, the ratio of the minimum wage to the median wage – is among the highest in the OECD, standing at 66 per cent. Since 2019, the minimum wage has risen by 48 per cent in cash terms – or 16 per cent after inflation – while output per worker has increased by just 2.4 per cent. What people earn is increasingly detached from productivity, meaning pressure on profit margins that must somehow be relieved.

Sadly, and inevitably, the impact has been felt most acutely by entry-level workers. Between 2021 and 2024, the age threshold for the NLW fell from 23 to 21, and the uprating was nearly 10 per cent per year. In the same period, the number of 16 to 24-year-olds known as NEETs (not in education, employment or training) increased from 689,000 to 946,000, while youth unemployment has increased from 9.2 per cent in 2022 to 16.4 per cent in the latest figures. We cannot attribute this to a single policy; higher employer NICs and welfarism do their own damage. But the primary suspect is obvious: the national living wage is too high, and it disincentivises businesses from taking a chance on young people with little work experience.

Older workers, however, are affected too. According to the Low Pay Commission, uprating the NLW now affects more than a third of workers. Employers are pushed to raise other salaries to maintain some kind of hierarchy but now struggle for a meaningful difference between mid- and entry-level roles, stifling aspiration. If a shop floor supervisor earns only £1.50 more each hour than a customer sales assistant, why would a customer sales assistant seek promotion given the extra burden of responsibility that comes with the role?

In a report published on Thursday with Matthew Bowles at the Prosperity Institute, I propose a simple solution: a five-year freeze of the National Living Wage. This is not a pay cut, and it still retains the wage floor. But, as the median wage rises, the ‘bite’ would fall back to its pre-NLW rate of 56 per cent. Based on regional employment data and NLW data spanning 2010–2025, our central estimate shows that the freeze would place up to 270,000 more young people in employment by 2031. On top of this, avoiding the long-term ‘wage scar’ that arises due to prolonged youth unemployment will collectively be worth £14.7 billion in lifetime earnings.

Freezing the NLW would not be without costs. Over the years of its freeze, inflation would erode nearly a tenth of the value of the NLW. Thus, we also propose that income tax thresholds be raised and employer NICs be reversed to at least their pre-April 2025 level.

We need to face the fact that the minimum wage is a blunt instrument to combat poverty, which is mainly a result of household circumstances and hours worked, rather than the base wage. Overall growth and targeted tax relief for low earners is the path forward, not a state-mandated wage ratchet.

It may sound harsh to freeze the national living wage, but forcing the long-term effects of joblessness onto young people and the wider economy will be far harsher.