David Kirkby is Senior Research Fellow at Bright Blue.

Yesterday on this site, George Osborne declared that of all the measures he has introduced as Chancellor, the introduction of the National Living Wage is the achievement he is proud of the most. The policy, which came into force yesterday, has raised the legal wage floor for workers aged 25 and over to £7.20 per hour, with an estimated 1.3 million benefiting. The Government has set a target of over £9 an hour by 2020.

There is no doubting the significance of the National Living Wage (NLW) or the power of it being announced by a Conservative Chancellor. When originally unveiled in the Summer 2015 Budget, the Commons seemed so astonished that Osborne decided to announce it a second time. With journalists scrambling to write new headlines, Iain Duncan Smith was unable to contain his exuberance, memorably waving his fists with delight.

The National Living Wage is now at the heart of the Government’s efforts to stay on the side of workers and to deliver social justice which is not merely state handouts. It is concrete, substantive and can be sold on the doorstep. No wonder the Chancellor wants Conservatives to “shout it from the rooftops”.

The introduction of the National Living Wage is shrewd politics. But it is a risk. There are uncertain economic consequences, which will take time to assess. There are five issues in particular to watch out for.

First, NLW could have an impact upon the supply of jobs. A higher wage floor may effectively price some workers out of the labour market, at least temporarily. The Office for Budget Responsibility has estimated that NLW will cost 60,000 jobs. While forecasts of job losses made when the National Minimum Wage was introduced turned out to be misplaced, the risks to forecasts run both ways. The Director General of the CBI has warned that the 60,000 figure may actually be an underestimate.

Second, digging beneath the top-line jobs figures, the effect of NLW is likely to vary widely between different sectors. For example, the Social Market Foundation has found that while only a tiny proportion of businesses in the energy, financial services or communication sectors will have over half of their employees affected by the NLW, this rises to over 90 per cent of businesses in accommodation and food.

Third, as well as variation across sectors, there will also be variation across regions. The Resolution Foundation has found that by 2020, NLW will be 47 per cent of the local median wage in London, compared to 71 per cent in the Sheffield and Nottingham city regions. Generally, regions with lower median wages will be more significantly affected by the higher wage floor. While workers in these regions will see greater gains, this may also erode some of the competitive advantage of situated businesses. This could undermine attempts to rebalance the economy and build a ‘northern powerhouse’. For this reason, Bright Blue has suggested varying the wage floor regionally.

Fourth, there is question over whether the NLW will push people who would otherwise be employees into self-employment. The National Living Wage does not apply to those self-employed and as the wage floor for employees rises this may incentivise employers to commission work through self-employed individuals rather than taking on employees. A survey of employers has suggested that some are seeking to mitigate the extra costs of the NLW in this way.

Fifth, NLW may have implications for Britain’s low productivity rate. While a higher wage floor may cost jobs, it may also incentivise firms to invest more heavily in capital and in training for their workforce. Indeed, the Chancellor has identified low productivity as a motivation for introducing NLW. There is evidence suggesting that the introduction of the National Minimum Wage in 1999 has had a positive impact upon productivity. Research from the National Institute of Economic and Social Research found that rises in the value of NMW: “…were associated with increases in total factor productivity, consistent with organisational change, training and efficiency wage responses to increased labour costs from minimum wages”

Especially given Britain’s internationally low rates of productivity, it will be important to watch whether NLW has any positive effects in this regard.

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