Why the new National Living Wage hits more than just salaries

That must be put in context — employment is up more than one million over the past two years alone and the jobless rate is at its lowest in a decade despite past sizeable increases in the Minimum Wage. However, some believe the impact on employment could be far larger.

Second, firms could pass on increased wage costs in the form of higher prices. That could keep profits unchanged but it would, of course, mean that some of the rise in household wages is gobbled up by higher costs of living. In other words, “real” wages (adjusted for higher prices) would not rise as much.

A third way firms might respond is to improve employees’ efficiency in return for higher pay, or provide them with fewer company benefits, both of which would put a lid on costs and thus limit the need to raise prices.

In reality, firms may well do a combination of all of the above.

The impact of the Living Wage across the UK will not be uniform. In London, for example, employers already have to pay higher wages to compensate for a higher cost of living. That’s why raising the limit for hourly pay will affect a smaller proportion of employees here than it would, say, in the North, where wages tend to be lower.

Not only are there variations by geography but also across industries. Some firms such as those in retail, catering and social care — and small businesses generally — might be impacted more by increasing the wages of their lowest-paid employees because a greater proportion of their staff are on the minimum wage to begin with. The finance industry, on the other hand, has a smaller percentage of employees earning the legal minimum, so a rise may not actually affect that many staff.

There could also be implications for migration. The planned rise in the Living Wage is set to increase it from around the Organisation for Economic Co-operation and Development average to the top third of countries by the end of the Parliament. This could make the UK an even more attractive destination for economic migrants should firms be willing to pay them higher wages.

The Living Wage could have far-reaching implications for the UK economy, but we should not consider its introduction in isolation. It was announced by the Government as part of a package of measures, with cuts to welfare spending likely to trump the combination of a higher Living Wage and rising income-tax thresholds when it comes to household finances. And if firms respond to higher wages by cutting back on employment, the positive impact on take-home pay may be less than expected.

George Buckley is chief UK economist at Deutsche Bank