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.