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.

Photo: Getty
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Labour's dilemma: which voters should it try to add to its 2017 coalition?

Should the party try to win over 2017 Conservatives, or people who didn't vote?

Momentum’s latest political advert is causing a splash on the left and the right.

One of the underreported trends of 2016 was that British political parties learnt how to make high-quality videos at low-cost, and Momentum have been right at the front of that trend.

This advert is no exception: an attack that captures and defines its target and hits it expertly. The big difference is that this video doesn't attack the Conservative Party – it attacks people who voted for the Conservative Party.

Although this is unusual in political advertising, it is fairly common in regular advertising. The reason why so many supermarket adverts tend to feature a feckless dad, an annoying clutch of children and a switched-on mother is that these companies believe that their target customer is not the feckless father or the children, but the mother.

The British electorate could, similarly, be thought of as a family. What happened at the last election is that Labour won votes of the mum, who flipped from Conservative to Labour, got two of the children to vote for the first time (but the third stayed home), but fell short because the dad, three of the grandparents, and an aunt backed the Conservatives. (The fourth, disgusted by the dementia tax, decided to stay at home.)

So the question for the party is how do they do better next time. Do they try to flip the votes of Dad and the grandparents? Or do they focus on turning out that third child?

What Momentum are doing in this video is reinforcing the opinions of the voters Labour got last time by mocking the comments they’ll hear round the dinner table when they go to visit their parents and grandparents. Their hope is that this gets that third child out and voting next time. For a bonus, perhaps that aunt will sympathise with the fact her nieces and nephews, working in the same job, in the same town, cannot hope to get on the housing ladder as she did and will switch her vote from Tory to Labour. 

(This is why, if, as Toby Young and Dan Hodges do, you see the video as “attacking Labour voters”, you haven’t quite got the target of the advert or who exactly voted Labour last time.)

That could be how messages like this work for Labour at the next election. But the risk is that Mum decides she quite likes Dad and switches back to the Conservatives – or  that the second child is turned off by the negativity. And don’t forget the lingering threat that now the dementia tax is dead and gone, all four grandparents will turn out for the Conservatives next time. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to domestic and global politics.