In 2016, then chancellor George Osborne introduced the national living wage (NLW), his poster child for efforts towards “higher pay and higher productivity”. The risk of job losses for the young and unskilled was seen as a worthy gamble to raise the wage floor from £6.70 to, ultimately, £8.72 per hour by 2020: a 23 per cent real-terms increase. Analysis of that experiment now offers something for everyone: fears over the impact on jobs appear overblown, but evidence that higher pay can induce a productivity boom has proven elusive.

The Low Pay Commission’s retrospective found that the NLW raised pay for 28 per cent of jobs, it estimates, either directly or by prodding firms into maintaining hierarchical pay gaps for staff. This delivered higher weekly earnings for the average low-wage worker, given little loss in their hours.

Studies find that some groups, particularly female part-time workers, did lose either jobs or hours, but there’s no consistent history of aggregate lay-offs. Most existing eligible workers therefore became better off.

The commission’s research admits, however, that there was no economic free lunch. Panglossian living wage campaigners had argued that by reducing staff turnover, or encouraging greater worker effort, higher minimum wages would boost productivity, compensating firms for heightened labour costs. Companies would find themselves compelled to invest in training or machinery, hire more effectively, or reorganise to improve efficiency. In time, a rising wage floor would prove a win-win for employees and employers.

This proved fanciful. Productivity investments are costly and their desirability is best judged by businesses. A higher minimum wage encourages many firms to hire more experienced workers or invest in otherwise uneconomic labour-saving technologies. Raising firms’ costs of production, though, will not enhance the overall productive potential of the economy. In fact, the commission finds that productivity growth in industry regions with high numbers of minimum-wage staff has been no stronger than elsewhere as the NLW increased.

This raises a conundrum: if lay-offs weren’t significant, and firms didn’t see productivity gains, then who bore the higher wage costs? Rather than just focusing on employment, economists such as American professor Jeffrey Clemens emphasise other subtle “margins of adjustment” that businesses tinker with, some of which can be highly damaging for workers.

In the short term, some businesses take the profit hit. But they are not charities, so this cannot endure without reducing new firm entry or pushing out existing rivals. In non-tradable sectors such as takeaway restaurants and hotels, minimum wage rises are therefore passed on to consumers via higher prices.

Firms can constrain headcount after minimum wage rises by reducing future hiring rather than laying people off. Frontier Economics has found that employment growth in low-paying firms was weakened by the NLW.

In industries where slowing hiring or raising prices is harder, firms find more innovative ways to manage costs. London School of Economics researchers say that social care and other low-wage industries increased zero-hours contract use significantly post-NLW, reducing worker security. US studies also find that increases to the minimum wage result in more firms using unpaid internships or non-compete contracts that restrict employees from leaving for rivals.

Up to 20 per cent of firms reacted to the NLW by cutting perks such as free amenities, discounts or breaks. The commission finds evidence too that businesses cut overtime and shift premiums for higher-paid workers. This, plus other training or investment cutbacks, means workers currently “benefiting” from higher mandated pay might in fact experience lower career earnings.

From less flexible schedules to higher prices, dampened hiring, the inefficiencies of compressed pay scales and less pleasant workplaces, the rising NLW had a real cost. The harsh reality remains that productivity gains and wage growth cannot be simply mandated by governments without consequence.