Labour’s proposal to introduce a “genuine living wage” could lead to higher unemployment and increased mortgage costs, economists at HSBC have warned.

Sir Keir Starmer’s party has pledged to bring in a ‘New Deal for Working People’ within its first 100 days if elected, which includes replacing the minimum wage with a living wage reflecting the cost of living.

HSBC economists Elizabeth Martins and Emma Wilks cautioned that raising the minimum wage significantly could increase business costs, reduce efficiency, and potentially lead to job cuts. “A higher minimum wage could increase costs and reduce efficiency, adding to unit labour costs. This in turn could either push firms into reducing headcount and/or sustain lingering inflation pressures, keeping the Bank Rate higher for longer,” they noted.

The minimum wage rose by a record amount in April, from £10.42 to £11.44, with employers’ average wage bills growing by 20% over the past two years. Labour’s plan would further elevate these costs, exacerbating concerns about inflation, which the Bank of England is closely monitoring. The Bank’s current base rate stands at 5.25%, and there is reluctance to reduce it until inflation is firmly under control.

HSBC highlighted that high wage growth is currently fueling inflation in the UK, particularly in the services sector, which has proven stubborn. “High wage growth is fuelling inflation in the UK at the moment,” the economists said, adding that services inflation is not “fully tamed.”

The Bank of England’s rate-setters are hesitant to cut interest rates from their 16-year high until they see a clear reduction in inflation. Markets are only fully pricing in one rate cut from the Bank this year after inflation and wage growth fell slower than expected in recent months.

In addition to inflation concerns, Labour’s plan could also impact public investment. The Institute for Public Policy Research (IPPR) warned that inherited spending plans from the Conservatives could offset Labour’s proposed investment of £4.7 billion per year in green energy projects, leading to real-term funding cuts for many public services.

The IPPR also noted that Labour might need to implement significant spending cuts or raise taxes unless the economy grows faster than expected. “Realistically, it is possible that Labour might have to raise taxation,” Martins and Wilks observed.

Despite these warnings, HSBC acknowledged potential positive outcomes. If successful, Labour’s wage proposal could boost employment and productivity by increasing worker motivation and encouraging more people to enter the workforce. This could help alleviate the UK’s current employment issues, particularly the high rates of long-term sickness keeping people out of work.

However, the economists tempered their optimism, suggesting that the best-case scenario might be overly hopeful. They also pointed out that some labour market improvements expected from Labour have already been partially implemented by the Conservative government.

Adding to the economic challenges, the UK has experienced the lowest level of investment among G7 economies for the third consecutive year in 2022. The IPPR reported that the UK has lost £1.9 trillion in investment over the past 32 years compared to the average G7 investment rate since 1990. George Dibb, associate director for economic policy at IPPR, emphasized the need for new investment to improve the UK’s economic performance.

As Labour outlines its ambitious plans for economic reform, the potential impacts on inflation, employment, and investment will be closely scrutinized by both economists and the public.

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Labour Risks Higher Mortgage Bills and Worse Unemployment, Warns HSBC