Labour must now clear a higher bar on the minimum wage

Vince Cable's announcements have allowed the Lib Dems to make the running on low pay but they still leave an opportunity to set out a tougher approach.

This year's pre-conference rumours gave unusual prominence to the minimum wage. After the consensus reached in the late 2000s, leading thinkers in all parties have begun to argue that it's time for the system to be strengthened. There were even suggestions that the Conservatives planned to announce an increase in the minimum wage at their conference. With as much as a fifth of the UK workforce now struggling on low pay, the problem has become too big to ignore.

So how is the battle shaping up now that party conferences are underway? Last week the Lib Dems fired the first shots with Vince Cable's announcement that he will strengthen today's minimum wage settlement in a number of ways. In Cable's speech itself there were few details, with the Business Secretary saying only that he had "asked the Low Pay Commission to advise how we might achieve a higher minimum wage without damaging employment". But later, at a Resolution Foundation event, he broke this down into three specific and interesting ideas. They raise the bar that Labour needs to clear next week if it is to show its commitment to tackling low pay.

Cable's first proposal is that the Low Pay Commission (LPC), which sets the minimum wage, should take a longer-term approach. In particular, he wants the LPC to say how, in an economic recovery, the minimum wage will recover the value it has lost in recent years. As Cable admits, he is walking a fine line here, taking the risk of undermining the LPC's independence, weakening a respected body that is vital to the minimum wage's success. But Cable is also right to say that the UK’s short-term approach to the minimum wage has become a limitation. It leaves business with little warning about future increases in the minimum wage and it leaves government with little advice on what it can do to tackle low pay over the long-term. Interestingly, it wasn’t always this way—in its early years, the LPC proposed future increase several years at a time. Getting this proposal right will mean finding a way to balance these downsides and upsides, for example through the 'forward guidance' model that Gavin Kelly has suggested on these pages.

The second of Cable's proposals is to ask the LPC to look into taking a sectoral approach to the minimum wage. This could mean, for example, publishing an assessment of the minimum wage that different sectors of the UK economy could afford to pay. Again, this isn't without risk. It would add complexity to a policy area in which simplicity is important. If the sectoral rates were to be made mandatory, this could make the minimum wage harder to enforce. It would also ask a lot of the LPC, which would likely need more resources and new structures to tackle such thorny judgments. But, again, Cable has identified a real limitation of today’s approach. As I argued earlier this year, the UK adult minimum wage is held back by the fact that it's a single rate, making it an inevitably ill-fitting garment. It pinches hard in some parts of the jobs market (for example, hospitality), and so has to be set with great care. Yet in other sectors, a higher rate would be possible without risking unemployment. A sectoral approach would sacrifice some simplicity in exchange for greater impact.

Finally, Cable says he'll ask the LPC to think about employer taxes when it makes its judgments about the minimum wage. The idea is that the LPC may be able recommend a higher minimum wage if, for example, the government said it would offset the costs to employers by cutting employer National Insurance at the same time. This is hard to get right; in particular, you'd need to find a way of cutting taxes that targets the employers who would genuinely struggle, rather than giving an expensive windfall to all. But again there are options worth looking into, for example a tax cut could be focused on small employers by raising the Employment Allowance the Chancellor recently introduced.

The delicacy of all of this demonstrates just how tricky it is to reform the minimum wage. Even with good intentions, it would be easy to wreck a system that has helped millions of low paid people, all while not costing jobs. Reform will mean trade-offs, giving up a bit of simplicity here in exchange for a greater impact there. This is why, when it comes down to it, Cable's proposals only amount to asking the LPC to look into these ideas, publishing its thoughts in its annual report next April.

For this reason, while Cable's announcements certainly raise the bar Labour has to clear at its conference next week, they still leave an opportunity to set out a tougher approach. Asking the LPC to review options is far from crazy — no organisation knows more about the challenges of setting the minimum wage. But it's also worth remembering that, if we'd asked a tripartite body like the LPC whether or not to introduce a minimum wage in the first place, we never would have had one. As evidence grows about the scale and costs of low pay, there may yet be an opening for a tougher approach.

Business Secretary Vince Cable delivers his speech at the Liberal Democrat conference in Glasgow on 16 September 2013. Photograph: Getty Images.

James Plunkett is director of policy and development at the Resolution Foundation

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Theresa May’s Brexit speech is Angela Merkel’s victory – here’s why

The Germans coined the word “merkeln to describe their Chancellor’s approach to negotiations. 

It is a measure of Britain’s weak position that Theresa May accepts Angela Merkel’s ultimatum even before the Brexit negotiations have formally started

The British Prime Minister blinked first when she presented her plan for Brexit Tuesday morning. After months of repeating the tautological mantra that “Brexit means Brexit”, she finally specified her position when she essentially proposed that Britain should leave the internal market for goods, services and people, which had been so championed by Margaret Thatcher in the 1980s. 

By accepting that the “UK will be outside” and that there can be “no half-way house”, Theresa May has essentially caved in before the negotiations have begun.

At her meeting with May in July last year, the German Chancellor stated her ultimatum that there could be no “Rosinenpickerei” – the German equivalent of cherry picking. Merkel stated that Britain was not free to choose. That is still her position.

Back then, May was still battling for access to the internal market. It is a measure of how much her position has weakened that the Prime Minister has been forced to accept that Britain will have to leave the single market.

For those who have followed Merkel in her eleven years as German Kanzlerin there is sense of déjà vu about all this.  In negotiations over the Greek debt in 2011 and in 2015, as well as in her negotiations with German banks, in the wake of the global clash in 2008, Merkel played a waiting game; she let others reveal their hands first. The Germans even coined the word "merkeln", to describe the Chancellor’s favoured approach to negotiations.

Unlike other politicians, Frau Merkel is known for her careful analysis, behind-the-scene diplomacy and her determination to pursue German interests. All these are evident in the Brexit negotiations even before they have started.

Much has been made of US President-Elect Donald Trump’s offer to do a trade deal with Britain “very quickly” (as well as bad-mouthing Merkel). In the greater scheme of things, such a deal – should it come – will amount to very little. The UK’s exports to the EU were valued at £223.3bn in 2015 – roughly five times as much as our exports to the United States. 

But more importantly, Britain’s main export is services. It constitutes 79 per cent of the economy, according to the Office of National Statistics. Without access to the single market for services, and without free movement of skilled workers, the financial sector will have a strong incentive to move to the European mainland.

This is Germany’s gain. There is a general consensus that many banks are ready to move if Britain quits the single market, and Frankfurt is an obvious destination.

In an election year, this is welcome news for Merkel. That the British Prime Minister voluntarily gives up the access to the internal market is a boon for the German Chancellor and solves several of her problems. 

May’s acceptance that Britain will not be in the single market shows that no country is able to secure a better deal outside the EU. This will deter other countries from following the UK’s example. 

Moreover, securing a deal that will make Frankfurt the financial centre in Europe will give Merkel a political boost, and will take focus away from other issues such as immigration.

Despite the rise of the far-right Alternative für Deutschland party, the largely proportional electoral system in Germany will all but guarantee that the current coalition government continues after the elections to the Bundestag in September.

Before the referendum in June last year, Brexiteers published a poster with the mildly xenophobic message "Halt ze German advance". By essentially caving in to Merkel’s demands before these have been expressly stated, Mrs May will strengthen Germany at Britain’s expense. 

Perhaps, the German word schadenfreude comes to mind?

Matthew Qvortrup is author of the book Angela Merkel: Europe’s Most Influential Leader published by Duckworth, and professor of applied political science at Coventry University.