Minimum wage: The only way is up?

On Britain’s low paid workers.

Tomorrow sees a 15 pence per hour pay rise for Britain's lowest paid workers. Of course, every penny helps, but don't expect to hear much gratitude. With RPI inflation running at 5.2 per cent, this year's VAT increase still being absorbed, tax credits being stripped back and any number of other pressures on the cost of living, this year's increase won't allow Britain's low paid to stand still, never mind move forward. The best that can be said is they will be getting poorer (given inflation) at about the same rate as those on average pay.

But before we rush to judgement on this apparently stingy increase, bear in mind that the Low Pay Commission (LPC), which oversees increases in the minimum wage, had a truly tricky job on its hands. Given anaemic growth and rising unemployment it's no surprise that they decided to err on the side of caution -- they couldn't risk making a tough labour market worse.

Whether or not precisely the right balance was struck this year, now is a good moment to consider the role the minimum wage has played in lifting living standards to date, and what more it might do in the future. Turn back the clock fifteen years and there were of course plenty of doom mongerers predicting the devastating impact on jobs if workers were unlucky enough to be afforded protection through a legal wage floor. Things turned out differently. As an authoritative study of the experience of the minimum wage to date concluded: "there is little or no evidence of any employment effects". Even those groups who were thought to be most vulnerable don't appear to have experienced a negative effect -- indeed the National Institute for Economic and Social Research recently found that employment rates are actually higher for those aged 22 (who get the full minimum wage) compared to those who are 21 (who get a lower rate), as the higher wage appears to have drawn more of them into work.

Nor can we put these findings down to the fact that the minimum wage has been pegged at rock-bottom levels. If we look at the period from its inception in 1999 up to 2010 it went up by around 65 per cent; massively outstripping CPI inflation (25 per cent) and RPI inflation (37 per cent), as well as out-performing median pay (hence the gap between those on low pay and those in the middle has fallen modestly).

At a time when most forces in our economy have been serving to squeeze the share of income going to the bottom, the minimum wage has pushed back in the other direction.

And there is evidence that the minimum wage may have benefited many people who actually get paid above the legal rate. A pay raise at the bottom can have a knock-on effect on those slightly higher up the earnings ladder, as these workers seek to protect their earnings relative to those below them. The implication is that many modestly paid workers may indirectly (and probably unknowingly) have benefited from the minimum wage.

We also know following a recent study that those firms and sectors most affected by the minimum wage have experienced significant increases in productivity as a result. Businesses don't just meekly absorb higher wages: they seek to change working patterns and investment decisions to enable them to succeed given higher costs (though admittedly larger firms find this easier than smaller ones). The Low Pay Commission was pipped to the post in arriving at this finding by a certain Sidney Webb who had precisely this insight a century ago -- armed with little more than economic intuition and precise prose, rather than today's econometric models.

In a world where few policies have a straightforwardly positive impact -- where even apparently benign measures often have malign side effects -- the minimum wage stands out as something of an exception. Its success is all the more noteworthy given that it embodies many of the attributes that, according to the current zeitgeist, make for Bad Policy. Regulation not de-regulation. National not local. Top-down not bottom up. Overseen by corporatist committee not small platoon. It has all the perfect characteristics to make it the pantomime villain in today's Whitehall.

Yet given its record, all parties feel the need to proclaim support (even if there is some sniping from the Conservative right).

Despite this apparent consensus there are still questions to ask about its future role. Over recent years the level of the minimum wage has fallen backwards relative to that of median earnings. Indeed, as the chart below shows, if we wanted the lowest paid in Britain simply to recover the ground they've lost relative to the "middle" since 2007, we'd need to see a steep climb in minimum pay over the next few years -- and all this in a period when overall wages are not expected to go up by much.

 

Whether or not this is remotely tenable obviously depends in large part on what happens in the wider economy. If we slip into another recession then calls for a rapidly rising minimum wage will be given short shrift. But if that doesn't happen, and the jobs market gradually recovers, this will itself prompt an important question: should the minimum wage really just be about maintaining a wage-floor in the difficult decade ahead, or should it seek to ensure that, at the least, Britain's low paid workers don't fall further behind everyone else? This question is likely to grow in salience.

For in an era of mounting cuts to tax credits for those in work, if the minimum wage doesn't play this wider role, it's not clear what else will.

Gavin Kelly is a former adviser to Downing Street and the Treasury. He tweets @GavinJKelly1.

SHUTTERSTOCK / MONKEY BUSINESS IMAGES
Show Hide image

The price of accessing higher education

Should young people from low income backgrounds abandon higher education, or do they need more support to access it? 

The determination of over 400,000 young people to go into higher education (HE) every year, despite England having the most expensive HE system in the world, and particularly the determination of over 20,000 young people from low income backgrounds to progress to HE should be celebrated. Regrettably, there are many in the media and politics that are keen to argue that we have too many students and HE is not worth the time or expense.

These views stem partly from the result of high levels of student debt, and changing graduate employment markets appearing to diminish the payoff from a degree. It is not just economics though; it is partly a product of a generational gap. Older graduates appear to find it hard to come to terms with more people, and people from dissimilar backgrounds to theirs, getting degrees.  Such unease is personified by Frank Field, a veteran of many great causes, using statistics showing over 20 per cent of graduates early in their working lives are earning less than apprentices to make a case against HE participation. In fact, the same statistics show that for the vast majority a degree makes a better investment than an apprenticeship. This is exactly what the majority of young people believe. Not only does it make a better financial investment, it is also the route into careers that young people want to pursue for reasons other than money.

This failure of older "generations" (mainly politics and media graduates) to connect with young people’s ambitions has now, via Labour's surprising near win in June, propelled the question of student finance back into the spotlight. The balance between state and individual investment in higher education is suddenly up for debate again. It is time, however, for a much wider discussion than one only focussed on the cost of HE. We must start by recognising the worth and value of HE, especially in the context of a labour market where the nature of many future jobs is being rendered increasingly uncertain by technology. The twisting of the facts to continually question the worth of HE by many older graduates does most damage not to the allegedly over-paid Vice Chancellors, but the futures of the very groups that they purport to be most concerned for: those from low income groups most at risk from an uncertain future labour market.

While the attacks on HE are ongoing, the majority of parents from higher income backgrounds are quietly going to greater and greater lengths to secure the futures of their children – recent research from the Sutton Trust showed that in London nearly half of all pupils have received private tuition. It is naive in the extreme to suggest that they are doing this so their children can progress into anything other than higher education. It is fundamental that we try and close the social background gap in HE participation if we wish to see a labour market in which better jobs, regardless of their definition, are more equally distributed across the population. Doing this requires a national discussion that is not constrained by cost, but also looks at what schools, higher education providers and employers can do to target support at young people from low income backgrounds, and the relative contributions that universities, newer HE providers and further education colleges should make. The higher education problem is not too many students; it is too few from the millions of families on average incomes and below.

Dr. Graeme Atherton is the Director of the National Education Opportunities Network (NEON). NEON are partnering with the New Statesman to deliver a fringe event at this year's Conservative party conference: ‘Sustainable Access: the Future of Higher Education in Britain’ on the Monday 2nd October 2017 from 16:30-17:30pm.