One in four firms have cut recruitment since the introduction of the national living wage, a study shows.
A survey of more than 1,600 business leaders revealed that a third planned to scale back hiring staff if the £7.20 an hour rate for adults increased to £9 by 2020. Others were looking at changes to staff hours, benefits or pay growth.
The British Chambers of Commerce (BCC) said the changes revealed by its research showed the rising cost burden on many companies.
Two out of three firms paid their staff above the national living wage (NLW), but 25% of those that were affected had increased their wage bill slightly, and 9% had increased it significantly, the report said.
Marcus Mason, head of education and skills at the BCC, said: "A decent wage can make a huge impact on employees' lives and their performance at work, and most businesses are able to pay above the NLW.
"However, a significant number of firms have already had to re-balance their books to meet the cost, which can have a knock-on effect on recruitment or growth plans.
"Many firms would have to change their business models, by increasing prices and reducing staff, if the NLW increases to £9 per hour by 2020.
"The Government needs to take an evidence-based approach to setting the NLW.
"The rate should be set by the Low Pay Commission and be determined by the state of the economy, weighing up the various pressures businesses face.
"Further increases need to be proportionate, reflecting business uncertainty, slowing growth and high input costs, to avoid having a negative effect on employment."
A Department for Business, Energy & Industrial Strategy spokesman said: "The Government is committed to building an economy that works for all and the national living wage is doing just that.
"We are making sure this works for employees as well as businesses, and will continue to back small firms by providing an environment in which they can thrive.
"The independent Low Pay Commission is chiefly responsible for making recommendations for National Minimum Wage rates, and now has additional responsibilities to help deliver the national living wage."
The Government has asked the Low Pay Commission to recommend increases to the national living wage towards 60% of median earnings by 2020.