Increasing the National Living Wage (NLW) for workers aged 25 and over to £17.50 in 2020 would represent an increase of 143% on the current NLW (£7.20) and of 94% on the current forecasted NLW of £9.00 by 2020.
Based on an underlying assumption that the wage distribution from April 2015 grows in line with the Office for Budget Responsibility (OBR) average earnings forecast made in March 2016, we estimate that in 2020, a NLW of £17.50 would be equivalent to around 116% of the projected median wage. Around 15 million employees would be covered by such an NLW, and labour costs would be around £150 billion higher in 2020 compared to a counterfactual of forecast average earnings growth (in nominal terms) due to the direct effects of the NLW. This is equivalent to an increase in total compensation of employees of almost 15%.
We also estimate that there would be somewhere close to 1.75 million job losses and somewhere between 65,000 and 119,000 business deaths. There would also most likely be a substantial reduction in hours worked, increased labour costs and increased prices, and obvious disincentives to starting new businesses.
This assessment is based on BIS analysis of provisional data from the Annual Survey of Hours and Earnings 2015 and is subject to significant uncertainty given that a National Living Wage of £17.50 is considerably higher than any previous NMW increase or any minimum wage internationally. Our cost estimates do not include estimates of any ripple effects higher up the wage distribution if employers were to restore wage differentials above the NLW.