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Where Vince Cable's idea of 'forward guidance' on the minimum wage came from

In a New Statesman blog earlier this week, Gavin Kelly suggested that the Low Pay Commission could set out "the path of future increases in the minimum wage over a number of years".

Business Secretary Vince Cable arrives at 10 Downing Street to attend a meeting of the Business Advisory Group. Photograph: Getty Images.

To coincide with the opening of the Lib Dem conference in Glasgow, Vince Cable has called for an increase in the minimum wage as a step towards restoring its real-terms value (now back to its 2004 level). He suggests that the Low Pay Commission could set out a process under which the increases would be staged over two to four years, stating that he is in a sense providing "forward guidance" (the term recently popularised by Mark Carney to describe his policy of not considering any rise in interest rates until unemployment has fallen to 7%).

All of which suggests that the Business Secretary has been paying close attention to the New Statesman website. In a piece published on Thursday, Gavin Kelly, the chief executive of the Resolution Foundation, wrote:

Given that the wage floor has already fallen back below the level it was at in 2004, there are some who would favour an immediate hike, perhaps up to the level of the Living Wage, regardless of the fragility of the labour market. Many others worry about the impact of a higher minimum wage on unemployment (even if it is falling a bit) and future job growth. Faced with these competing pressures, policy-makers remain locked-in to the status quo in which the Low Pay Commission (LPC) takes an evidence-based, incremental, and typically cautious look at the level of the wage floor every 12 months.

One possible route through this bind would be to set out how the minimum wage would increase over time if, and only if, the recovery is sustained. If this sort of conditional approach towards policy-making sounds familiar it’s probably because it echoes the much hyped ‘forward guidance’ for monetary policy which has been introduced by Mark Carney at the Bank of England.

In relation to low pay, forward guidance could mean the LPC setting out the path of future increases in the minimum wage over a number of years so long as the recovery is maintained and unemployment falls. If, however, the economy weakens the LPC would revert to setting the minimum wage a year at a time. This approach would mean a shift from the established pattern of annual uplifts but it wouldn’t be wholly exceptional (the LPC has in the past set out its intention to increase the minimum wage above average earnings over a number of years).

With both the Tories and the Lib Dems now discussing the possibility of major increases in the minimum wage, the onus is now on Ed Miliband to offer greater policy detail on issues such as the living wage. While the party will not pledge to introduce a compulsory version, as many activists would wish, it is likely to promise to take significant steps to increase its use in the private and public sector. This could include making it compulsory for all government departments and contractors to pay the living wage and establishing "living wage zones". As outlined by the Resolution Foundation and the IPPR, the zones would operate by transferring some of the savings received by the Treasury through the payment of the living wage (lower benefit payments and higher tax revenues) to local authorities to help them work with businesses to increase wages to living wage levels.