Are Minimum Wage Increases Bad For Business Owners?

With Rachel Reeves expected to raise the minimum wage by 6% in April 2025, there has been a lot of backlash from business owners (not least from Iceland’s chairman Richard Walker) that an increase in minimum wage could have any or all of three negative effects on the UK economy.

1. That people on the current minimum wage may be made redundant.

2. That the additional labour costs will be passed on to the consumer (inflation, in other words)

3. That companies will go bankrupt due to increasing labour costs being forced upon them (Richard Walker argues that this may happen to Iceland if minimum wage is increased by 6% in 2025).

To analyse if increasing minimum wage can cause any of these negative effects to the UK’s economy, we went through past minimum wage increases since 1991 to see how they affected:

• Employment rates
• Inflation
• Company insolvencies

• There is no historical evidence suggesting that increasing the minimum wage by more than 6% will increase unemployment

• 50% of the years that minimum wage has increased by more than 6% inflation has gone up higher than average. However this includes 2022 and 2023 where post covid supply chain issues massively contributed to inflation.

• There is little to no evidence that increasing minimum wage will lead to companies going bankrupt.

Quick answer: There is no evidence that increasing the minimum wage by more than 6% will create unemployment.

We found that of the twelve times in the last 25 years that minimum wage has increased by more than 6% unemployment only went up three times.

This was in:

• October 2001 where the minimum wage went up by 10.8% and there was only a 0.1% increase in unemployment.

• October 2006 where the minimum wage went up by 5.9% and there was a 0.6% increase in unemployment.

• April 2023 where minimum wage went up by 6.6% and there was a 0.1% increase in unemployment

These are modest increases in unemployment compared to the 2008 financial crisis where unemployment increased by 1.9%.

The take home here is that 75% of the years where the minimum wage increased by more than 6% unemployment did not go up.

You can find a table with minimum wage and unemployment data below:

Quick answer: There jury is very much out on whether increasing minimum wage by more than 6% will increase inflation.

We found that of the eight times in the last 25 years that minimum wage has increased by more than 6% inflation went up more than normal 5 times.

In other words, based on what's happened in the past, a 6% increase in minimum wage has a 62.5% chance of contributing to increasing inflation.

This includes 2023 and 2024 where post-covid supply chain issues and Russia’s invasion of Ukraine increasing the cost of staples like cooking oil and gas heavily contributed to inflation.

You can see a table showing how increased in minimum wage has affected inflation below:

Quick answer: There is little to no evidence that increasing minimum wage will lead to companies going bankrupt.

The years with the highest number of company insolvencies in the last 25 years were:

• 2023 (25,188 companies declared bankruptcy)
• 2009 (23,856 companies declared bankruptcy)
• 2022 (22,123 companies declared bankruptcy)
• 2008 (20,953 companies declared bankruptcy)

Of those four years, only 2023 saw a minimum wage hike of over 6%.

In fact, five of the 8 years that the minimum wage rose by more than 6% there were fewer than average company insolvencies that year.

The table below shows how minimum wage affects company insolvencies. For context the average number of company insolvencies a year in the UK is: 17,268

Commenting on these findings, Jordan Macey, Head of Accounting at GoForma said:

“The three main objections to raising the minimum wage are increasing unemployment among minimum wage workers, contributing to inflation, and causing potential company insolvencies.

Twenty five years of historical data on this suggests no strong correlation between significant raises to minimum wage and any of these negative outcomes.

Even weak correlations between raising minimum wage and increased inflation pales into insignificance compared to macro economic factors such as wars and mass scale strikes which are often caused in part by minimum wages that do not sufficiently cover the cost of living”.

To find historic increases in minimum wage, GoForma looked at data from the Low Pay Commission and the Gov.UK’s website.

They then compared this to historic unemployment data from the Office of National Statistics’ Unemployment and Labor Market and historic inflation data from the Office of National Statistics Inflation and Price Indices.

They also compared this to company insolvency figures from GOV.UK’s Insolvency Service

You can find the full table of findings below: