Businesses have urged Chancellor John Healey to moderate plans for raising the national living wage (NLW) in the upcoming October Budget, warning that a steep increase in labour costs could lead to job losses and exacerbate inflationary pressures. The government is considering adjustments to the minimum wage as part of its ongoing efforts to support low-income workers, but business groups caution that further hikes could hamper employment, particularly among young people.

Since the NLW target was introduced by former Conservative Chancellor George Osborne in 2015, the UK has seen the minimum wage rise faster than average earnings, positioning it among the highest pay floors in developed economies. However, rising labour costs have also coincided with concerns that businesses, especially in sectors like retail and hospitality, may respond by raising prices or reducing staff. This is a significant concern given that ministers are seeking to increase employment opportunities for young people outside education or training.

The number of young people aged 16 to 24 who are not engaged in education, employment, or training—commonly known as Neets—has recently approached one million in the UK, raising alarm among policymakers. At the same time, the Bank of England has highlighted risks that accelerating wage growth could feed persistent inflation, which remains elevated following recent energy price shocks. Consumer price inflation is projected to remain above 4 percent into early 2027, reducing the real-terms value of prior NLW increases such as the 4.1 percent rise introduced last April for workers aged 21 and over.

In response, business groups have called on Healey to align the NLW increase in 2027 with average earnings growth rather than continuing the rapid hikes seen in recent years. They have also recommended pausing plans to raise the minimum wage for workers under 21 to the same level as older employees. The manufacturing trade association Make UK has urged the government to limit the next NLW increase to 3.7 percent, matching the rise needed for the wage floor to remain at two-thirds of median UK earnings.

The Confederation of British Industry (CBI) has called for a longer-term framework linking future NLW increases to productivity growth in low-paying sectors. The CBI also suggested that any further adjustments to youth minimum wage rates should depend on a notable reduction in the number of Neets. Matthew Percival of the CBI said the current shortage of jobs was largely driven by rising employment costs, and cautioned against accelerating NLW growth ahead of the two-thirds median earnings target under these conditions.

Meanwhile, analysts at the Resolution Foundation acknowledged that Labour faces the political challenge of balancing real-terms pay increases with employment levels. Greg Thwaites, a research associate at the Foundation, noted that Healey's main focus will likely be on expanding employment opportunities and helping to reduce inflationary pressures as the Bank of England continues its tightening cycle.

A government spokesperson emphasized the administration’s commitment to fostering an economic environment that supports both businesses and workers. They added that the Low Pay Commission (LPC) has been directed to prioritize the job prospects for younger workers in their recommendations on minimum wage policies.