Younger workers missing out on the new higher minimum wage may still be frozen out of the job market, a Government report has suggested.
Ministers justified excluding under-25s from the £7.20-an-hour National Living Wage (NLW), to be introduced next year, as being on a lower rate would make them more attractive to employers, and get them much-needed work experience.
But the Department for Business, Innovation and Skills’ official impact assessment of the policy say higher pay for older workers could “reduce the likelihood of employees leaving their jobs”, undermining opportunities for youngsters.
The Low Pay Commission watchdog is to examine “uncertainties” over the impact of the NLW on under-25s, including whether employers “began substituting their older workforces with cheaper younger workers”, it says.
It will also look at the prevalence of employers, such as coffee chains Starbucks and Costa Coffee, that have vowed to pay the higher hourly rate regardless of age.
Frances O’Grady, the TUC’s general secretary, told The Huffington Post UK: "The Government has failed to provide evidence for paying under 25s less than the National Living Wage.
"They face the same expenses as other adults and are highly productive. Not paying them the full minimum wage will demotivate younger adults, who will get less pay than their colleagues for the same work."
In this summer’s budget, Chancellor George Osborne announced a new minimum wage for over 25s would come into force from next April, starting at £7.20 an hour and increasing to £9 by 2020.
But those under 25 will be on the old minimum wage rates, meaning they are entitled to £6.70 an hour, down to £5.30 for 18 to 20 year olds and £3.87 for under 18s.
In October, Government Minister Matthew Hancock suffered a backlash after saying workers under the age of 25 are not “productive” enough to warrant being paid the new higher wage.
The assessment, published quietly last week, also revealed businesses face a £1 billion annual hit as a result of the flagship announcement.
The report reveals the move will boost pay packets of 1.7 million workers and that a full-time employee currently on the minimum wage will see their wages swell by £910 a year.
But the figures also spell out the £1.1 billion burden faced by businesses made up of increased labour costs, the “ripple effect” of pushing up wages of higher paid workers and transition costs.
Seamus Nevin, head of employment and skills policy at the Institute of of Directors, told HuffPost UK that alongside a new apprenticeships levy businesses are faced with “considerable” costs.
Mr Nevin said: “IoD members supported the introduction of the Chancellor’s Living Wage as part of a deal he made with business - lower taxes for higher wages.
“Worryingly, however, the Chancellor’s £1 billion living wage is not the only extra cost businesses have been hit with.
“A new payroll tax, in the form of the apprenticeship levy, will cost employers £12 billion over the course of the parliament, while the next tranche of pensions auto-enrolment will impact the very smallest businesses.
“This is not to mention a number of significant additional reporting requirements firms will have to comply with. The cumulative effect of these will be considerable, particularly for those medium sized businesses that just meet the threshold for compliance.
“It is imperative that the government now comes good on its promise of less red tape, fewer regulatory hurdles and a lower rate of corporation tax to help employers absorb these additional costs and raise pay.”
But the TUC's Ms O'Grady said: "The Government's impact assessment only looked at the costs of a pay increase, not the benefits.
"With increased pay, companies can expect to see happier, more productive workers, but these figures ignore this.
"Many companies can also expect to see an increase in business, as workers across the country get a little extra money to spend."
The report says the NLW would stop employers undercutting competitors by paying “unacceptably low wages”.
It acknowledges while low rates will make younger workers “more attractive to employers”, it adds: “On the other hand, there is evidence to suggest that higher pay floors reduce the likelihood of employees leaving their jobs.”
A spokesperson for the Department for Business, Innovation and Skills said the priority for younger workers is to secure work and gain experience, that youth unemployment is higher and wages tend to increase through the early 20s as workers gain more experience.
She added : “The Government believes now is the time to move to a higher wage, lower tax, lower welfare society. We have set the aspiration that the National Living Wage reaches 60% of median earnings by 2020. The initial rate of £7.20 puts us on the pathway to this target.
“It is important that the impact of rises in the National Minimum Wage and the National Living Wage balance the need to provide a fair wage while not damaging business.
“We are introducing steps to mitigate the cost on business through increasing the Employer Allowance from £2,000 to £3,000 which will benefit up to 590,000 employers.
"We are also cutting corporation tax from 20% to 18% by the end of the Parliament which will benefit over a million firms, save businesses £6.6 billion by 2021, and give the UK the lowest corporation tax in the G20.”