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Government lays groundwork for slashing minimum wage

The Government has instructed the Low Pay Commission to consider the impact of the minimum wage on “employment and the economy”.

Photograph: Getty Images

The Telegraph suggests that the government is considering freezing or cutting the minimum wage if it starts to cost jobs or damage the economy. Christopher Hope reports:

The minimum wage for millions of people could have to be capped or frozen in future if it risks damaging jobs or the economy, the Government has said.

It has told the Low Pay Commission, which sets the minimum wage, that it must formally consider its impact on “employment and the economy”, before agreeing future increases.

The change, which will be written into the Commission’s new terms of reference, raises the prospect of the first ever across-the-board freeze or cut in the minimum wage for everyone if the economic uncertainty continues.

Let's leave aside, for the moment, the fact that the minimum wage has risen below inflation – and thus faced an across-the-board cut in real terms – every year since the recession. The Low Pay Commission is, it seems, perfectly capable of examining the level of the minimum wage and deciding it's too high, and has done that four years in a row.

When you look at the actual history of the minimum wage in the UK since its introduction in 1999, the key thing that stands out is how few negative effects it has had at all. As Tory MP Matthew Hancock told the Resolution Foundation last week:

The standard argument against the minimum wage is that a minimum wage would price people out of jobs. But the academic analysis doesn’t back it up. The analysis of the impact of minimum wages is one of the most studied areas of economics.

There are so many studies that economists now publish studies of studies, bringing all the data together. Two of the most recent, which together analysed 91 studies, found that “the minimum wage has little or no discernible effect on the employment prospects of low-wage workers.”

Many reasons are cited by the study, including increased pay raising the efficiency of the workforce, and the very small impact of minimum wage increases on the total pay bill. After all, work is a team effort. Working out how much of a firm’s revenue is down to which member of the team is an imprecise art at best. Just as with high pay, the question of just rewards is important.

A phrase favoured by right-wing economists is that it is "economics 101 that the minimum wage increases unemployment". Going by the available evidence, it seems like there's a reason economics 101 is followed up by economics 201 and economics 301.

But while the information we have suggests that the Low Pay Commission has handled its task well, that doesn't mean we should ignore the possibility that a minimum wage set too high might damage employment. Indeed, that's clearly something the Low Pay Commission examines, as it explains the real-terms cuts coinciding with the recent spike in unemployment. The Government telling the Commission to "formally consider" employment and growth is just an emphasis on areas formerly implicitly covered.

But the minimum wage would have a strong rationale even if it did slight harm to growth and employment. After all, all expectations were that there would be a slight increase in unemployment after we introduced it in 1999, and although that didn't happen, it wouldn't have been the wrong decision if it did.

You can rationalise a minimum wage which slightly harms employment by asking what the role of the welfare state actually is. If it's to help people of low incomes across the board, then the key thing is to get everyone into work no matter how badly paid, and top their quality of life up to an acceptable level. If, conversely, it's a safety net to help those out of work, then there's not much to be said for the prospect of people in work still needing help. To put it in the Blairite language with which it was promoted, the minimum wage is about making work pay. If work doesn't pay, and is subsequently made unviable by a – still very low – minimum wage, then it's not the biggest hit ever taken.

Similarly, a slight hit to growth caused by the minimum wage can again work out OK, especially if redistributionist policies ensure that the paid from that hit is taken by the rich. Compare it, for instance, to tax. It is widely accepted that there is a deadweight loss to taxation – that is, the act of taxing people reduces their incomes by more than the amount of revenue received. Nonetheless, we do it, because we think it might be worth turning a pound in a rich person's pocket into 90p in the hand of someone poor. And the same is true of the minimum wage – the unambiguous winners of it are working poor people, and if the hit is taken by people richer than them, that might be a decision worth taking. Every policy has trade-offs, and requiring the minimum wage to have absolutely no negative effects is holding it to a standard no other policy could live up to.

The Government's instruction to the Low Pay Commission to do something they are already doing will hopefully remain just that. But if it becomes the start of a whispering campaign to suggest that minimum wage laws are making us all worse off, remember that they aren't; and that even if they were making some of us worse off, it might well be worth it given those whose lives they improve.