Leader: The growing consensus for a higher minimum wage

Fifteen years after its introduction, the minimum wage is an established feature of the political landscape, its abolition all but unthinkable. Should it now be increased? 

Photo: Getty
Photo: Getty

When Tony Blair first committed Labour to the introduction of a national minimum wage, the reaction from business bordered on hysteria. Higher wages, it was argued, would reduce competitiveness and destroy healthy companies. Although few economists ventured to guess exactly how many jobs would be lost, the consensus was that it would be a lot.

They were wrong. The new rules came into force in April 1999, yet unemployment rates continued to fall and – more damagingly for opponents of the policy – so did youth unemployment. Critics were reduced to claiming sheepishly that the figures would have looked even better without a minimum wage. Within a year of the policy being introduced, the Conservatives had reversed their opposition to it.

A decade and a half later, the national minimum wage is an established feature of the political landscape, its abolition all but unthinkable. The Conservative leadership, indeed, is falling over itself to support a policy it once warned would trigger economic crisis. In January, George Osborne voiced his support for an increase in the wage to £7 an hour, nearly 30 per cent higher in real terms than its value at its introduction. When Matthew Hancock, the skills minister, took to Twitter to attack Labour’s latest plans for an increase, his criticism was not that those wretched socialists were destroying British industry, but that Ed Miliband’s proposals looked tepid compared to what his own party was already offering.

Labour’s latest plan, in fairness, is both more ambitious and more complex than the one put forward by the government. Mr Miliband has declined to set a straightforward numerical target, as Mr Osborne has. Rather, a future Labour government would aim to peg the minimum wage permanently to average national earnings. Although nothing is confirmed, one oft-discussed possibility is that the minimum wage would be fixed at 60 per cent of median earnings, the standard definition of the poverty line (it stands at 54.6 per cent). It would thus become impossible to be in full-time work yet remain in statistical poverty.

To reduce the immediate impact on business, the change would be phased in over the length of a parliament. Nonetheless, it is a certainty that there will be objections to Labour’s plans. Some employees, business leaders will argue, do not generate 60 per cent of the median value: paying them more means employing them at a loss. The original minimum wage may not have resulted in corporate bankruptcies and mass job losses but this new version most assuredly will.

There are a few possible responses to such wolf-crying. One is simply to note that those executives who claim to be most concerned about bankruptcies and job losses remain remarkably reluctant to cut their own incomes to prevent them. Another is to point out that, as things stand, the government is subsidising poverty wages through the welfare system. Such a phenomenon should be an affront to taxpayers and fans of free markets alike.

More to the point, however, certain studies suggest that an increase in the minimum wage can lead to an increase in employment. This should not be surprising: while the rich can hoard an increase in their incomes, the poor are almost certain to spend it and so stimulate the economy.

Even if the doom-mongers are right, most of their predicted job losses are a few tens of thousands. Without wishing to talk down the impact on those directly affected, this is, in the national context, little more than a rounding error and in a healthy and growing economy should pass almost unnoticed. A tiny and temporary increase in unemployment may be a price worth paying for an increase in the living standards available to the majority of those on low wages.

As such, the growing political consensus that it is time for a higher minimum wage is to be welcomed. It is a rare and pleasant feeling to see the politicians engaged in a race to the top, rather than one to the bottom.

If there is a criticism to be made, it is not that the policy is unrealistic but that it is incomplete. The recent crisis of living standards is a result not simply of low wages but of high costs. And the greatest culprit by far is the exorbitant cost of housing, especially in the crowded south-east. Until the political class shows it is willing to make the tough decisions necessary to tackle that, any true increase in living standards will remain out of reach.