The British national living wage: An overly ambitious policy?
Great Britain has been running one of the most ambitious minimum wage policies in recent years—overly ambitious, I would argue. The so-called national living wage rose from over £7 in 2017 to £12.21 this year (+74%). In the last three years alone, it increased by about 28.5%, considerably faster than wage growth in the middle and top of the income distribution.
The end result has been pronounced wage compression with minimum wage workers in the U.K. now earning about two-thirds of the median wage.
While the objective to reduce wealth inequality is obviously laudable, the policy has had several unintended consequences.
For starters, regional inequality in the U.K. is high compared to other advanced economies. The minimum wage is binding nationwide, no matter if you employ workers in London or a poorer region like the North East, where median hourly earnings are around 16.50, a mere 35% higher than the wage floor.
50% of all workers in the North East are now crammed into an extremely small pay range that barely spans four pounds! Earnings data from 2024 shows that more than 8.5% of all British workers were within the narrow range of £11.40 to £11.80, just above the previous minimum wage floor of £11.21 (and as of April 2025, the lower end of the distribution has shifted up by about one pound).
The British minimum wage debacle
If you’re wondering why this significant wage uplift is actually a problem, consider the three following effects:
First, entry level positions in the U.K. for graduate workers are now barely paying more than the minimum wage. Spending several years studying in higher education does not seem to pay off in the U.K. anymore. While it is only right that blue-collar occupations also earn a fair living, from a long-run growth perspective it is problematic if the rewards from earning a graduate degree are minimal.
Second, there is absolutely no doubt that the massive wage lift at the bottom has scarred U.K. employers. Even as GDP growth has performed better than anticipated, several industries have shed jobs since October. The job losses have been concentrated in hospitality, retail, and construction, which are precisely the sectors that are affected the most by the higher wage floor. The minimum wage has therefore hurt some of the workers it is supposed to help as companies have laid off employees, reduced working hours, and slowed recruitment.
Last but not least, the U.K. continues to have an inflation problem—and rapidly surging wages at the bottom of the distribution due to the minimum wage policy have added fuel to the fire. With service price inflation remaining close to 5%, the Bank of England (BoE) has no choice but to leave interest rates higher for longer to slow down the economy. This, in turn, causes job losses and slows down hiring. .
The overly aggressive minimum wage hike, paired with the National Insurance Contribution increase has therefore led to adverse macroeconomic conditions, such as higher inflation and a weaker labor market.
Is Germany following suit?
Germany’s minimum wage policy is now also facing a pivotal moment. Standing at only €8.50 in 2015, it will reach €14.60 by January 2027. This means German minimum-wage workers could earn close to €2,500, making it the second-highest minimum wage in the European Union.
While the intent is to shield low-income workers from inflationary pressures, economic theory suggests such dramatic hikes can carry unintended costs—especially during times when the labor market is weak.
If Germany follows the same path as Britain, it risks eroding job opportunities for the very workers it aims to help, while burdening small businesses already squeezed by rising input costs. Employers might ultimately respond with a combination of automation, reduced hours, and scaled back recruitment.
Germany’s large low-wage sector
A unique feature of the German labor market is that the share of low-wage earners—defined by the OECD as making less than 67% of median earnings – is extremely high compared to other European nations. While close to 20% of German employees are low-wage earners, the number for France is less than 10%.
There are several reasons for this preponderance of low-wage earners. Following Germany’s unification, the country struggled from high structural unemployment and a weak labor market in the late 1990s. Several far-ranging policy changes (Hartz reforms) led to a massive expansion of temporary agency work and so-called Mini jobs, a form of marginal part-time employment that is exempt from Social Security contributions (and therefore less costly to employers).
While the upside of all these changes was a substantial increase in the employment rate (especially for marginal groups such as students, pensioners, migrants and low-skilled workers), the downside was a large increase in the share of low-paid work. Germany basically traded high unemployment for an expansion of the low-wage sector.
Millions of workers affected, but Germany has one main advantage
Given Germany’s large low-wage sector, it is estimated that 10% of workers were affected when the minimum wage was introduced in 2015. While the uplift to €13.90 covered approximately 16% of total employment, the increase to €14.60 by 2027 might affect some eight million workers—close to 20%!
Following two years of recession, Germany’s economy has seen a rise in unemployment alongside a substantial decline in hiring. The obvious risk is that German employers will respond with further layoffs when faced with such a dramatic surge in employment costs.
On the other hand, Germany has one main advantage over Britain: the government just initiated one of the most aggressive fiscal stimulus programs the country has ever seen with about a trillion Euros of additional public spending in the coming years. Forecasts suggest one percentage point of additional GDP growth in 2026. Given that the spending is geared towards construction and defense, labor shortages in the blue-collar sector will start to crop up again very soon. This will lead to substantial upward pressure on wages, especially for manual workers. In a heated labor market, a high minimum wage might not be such a big deal after all—but whether this will turn out to be the case remains to be seen.
What does that mean for recruiters?
For recruiters, these upcoming wage hikes will reshape the talent landscape as millions of workers are suddenly lifted into a narrow pay band. Hiring will become more competitive in low-wage sectors even as some employers may reduce openings or rely more on automation and temporary contracts due to higher labor costs. Recruiters will need to anticipate these shifts, guiding clients and candidates through a market where opportunities may shrink in some industries but expand in others fueled by massive public investment programs.
