The introduction of what is being called the “Rachel Reeves rule” is impacting workers' ability to earn the national living wage of £12.71 per hour, a rate currently set for employees aged 21 and over. Meanwhile, workers aged 18 to 20 are entitled to a minimum of £10.85 per hour. However, mounting business expenses, especially high business rates and employment costs, are making it increasingly difficult for small business owners to pay themselves—and their employees—a living wage.
The Federation of Small Businesses (FSB) warns that employment costs, such as the national living wage, employer National Insurance contributions (NICs), and auto-enrolment pension schemes, are squeezing small business profits to precariously low levels. This financial strain results in fewer sustainable jobs and threatens the viability of many small enterprises.
In a similar vein, the Institute of Directors (IoD) urges the Labour Party government to rethink its policy of equalising minimum wage rates across all age groups. They stress that resolving youth unemployment requires tackling the financial pressures associated with hiring younger workers.
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However, the Resolution Foundation presents a more nuanced analysis. Their study finds that cutting employer NICs or reducing minimum wages for under-21s—a common demand among business groups—would have minimal impact on boosting youth employment. Most under-21 workers are already exempt from employer NICs, meaning repealing them would yield limited benefits. Moreover, scrapping employer NICs for under-25s entirely could cost the government £5.1 billion while only creating approximately 38,000 new jobs, an inefficient expenditure of public funds.
The Foundation also highlights that reversing recent youth and adult minimum wage convergence would lead to only a slight increase in young people’s employment—about 15,000 more jobs. However, this would come at a significant cost to young workers’ earnings, with 230,000 individuals aged 16 to 20 potentially losing out on £379 million annually.
From an economic perspective, investing in apprenticeships offers far greater returns. For workers aged 19 to 24, apprenticeships generate public benefits valued at £13 to £15 for every £1 spent, compared to just £7 for older workers. Furthermore, ringfencing apprenticeship levy funds for under-25s last year could have freed up £1.55 billion, enough to fund 145,000 young apprenticeships and provide firms with £2,000 incentives each.
Lindsay Judge, research director at the Resolution Foundation, notes with concern that the number of young people not in education, employment, or training (NEET) has surpassed one million—a sobering reflection of the challenges facing youth employment today.