Minimum Wage must be Index Linked, says IoD

30 September 2005

The latest rise in the national minimum wage should be the last above earnings increase, employers said today. The 4% rise to £5.05 an hour, due to come into force on 1 October, was unadvisable in the current weak economic conditions, the Institute of Directors (IoD) argued. Future increases should be indexed in line with earnings.

Graeme Leach, Chief Economist at the IoD, said:

"Employers will need to raise the productivity of minimum wage workers by 10% over the 2005-2006 period, in order to offset the increases pencilled in for this year and next and keep unit labour costs unchanged. This is virtually impossible in the current economic climate.

"Productivity growth is weakening not strengthening - UK productivity growth was the lowest in 14 years in the second quarter of this year. Up until 2004, IoD members reported relatively few problems with the minimum wage. However, over the past year, more businesses have voiced serious concerns at the damage to competitiveness from continued over indexation of the minimum wage. There is now a real risk that the national minimum wage could lead to significant job losses as the economy weakens."

The planned 6% increase to £5.35 per hour next year should be rejected when the decision is reviewed by the Low Pay Commission in February 2006, the IoD said.