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17 March 2015

A higher minimum wage for London is good for the capital – and the rest of the country, too

A higher minimum wage for London is good for the city - but crucially, wouldn't hurt workers elsewhere either.

By Kitty Ussher

There is a common misconception that having a separate, higher, minimum wage for London as Tessa Jowell argued for yesterday would somehow mean that it would need to fall elsewhere, as if the current rate was some kind of average. But this is not borne out by the data. In fact the minimum wage is already set at the level that is right for the rest of the UK but has hardly touched people doing exactly the same jobs in London.

Since its introduction in 1998, the effect of the national minimum wage has been to narrow the difference between the wages of the lowest paid outside London and within London, from around 20 per cent to around 7 per cent.  It has lifted the pay of cleaners, retail workers, carers and others on the lowest incomes outside the capital, but has had far less impact in London. Had it been set at the right rate for London, jobs would have been lost elsewhere. So it isn’t so much as an average as the rate at which it won’t cause a problem for any low paid worker anywhere, even in the economically weakest parts of the country. For London therefore, which could just as well be on a different planet in economic terms, it has passed the poorest by, despite the higher costs they face.

At its current level the minimum wage only affects around 2-3% of workers in London, half that of the country as a whole. This isn’t because London has less people on low pay – unfortunately – but because it has an entirely different economic structure – higher property prices, different industries, different consumer spending patterns – to the rest of the country. This has meant that the free market has always caused the lowest paid in London to be paid a little more per hour than elsewhere. To have the same economic effect as the national minimum wage, the London rate would therefore need to be higher.

This is why Tessa Jowell is right to call for a higher minimum wage rate for London, as she did in this article yesterday. As a general rule we should be cautious of politicians seeking headlines by advocating a raise in the minimum wage. One of the most successful institutions we have created in Britain in recent years is the Low Pay Commission, precisely because it takes the politics out of the decision. Instead it brings together the views of employers, academics and trade unionists supported by sound evidence and recommends a minimum wage rate that it believes the economy can support without losing jobs. 

But on this occasion the principle she espouses is a sound one. As I argued in a recent report for the independent Centre for London think tank , we need a change in legislation to enable the Low Pay Commission to recommend the level of a separate London rate, for democratic sign-off by the Mayor.

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This would then enable the Low Pay Commission to take into account the different wage distribution in London, the supply side effects from higher housing and childcare costs, the fact there are less export-sensitive manufacturing jobs but a stronger catering and hospitality sector, the experience of other city-wide minimum wages elsewhere in the world, notably San Francisco, and come up with a recommendation which in its opinion could support the lowest paid in London without jeopardising jobs.

Having a different minimum wage in London from the rest of the country is unlikely to cause unwelcome consequences at the boundaries. Indeed many firms already operate a London weighting, and, as our report argues, the experience of the US suggests there is no evidence of any adverse effect at the boundaries where cities have different wage rates.

Presuming it follows the same approach as in previous years the Low Pay Commission would most likely start modestly and see how London firms react, but given that the difference in the wages of the lowest paid was 20 per cent before the minimum wage increased wages elsewhere it is reasonable to presume that that is the kind of differential that could be sustained in the longer term – equivalent to a minimum wage in London of around £7.80 in today’s money over time.

This is all without prejudice to the excellent Living Wage campaign which is calculated entirely differently based on the higher costs of living in London, rather than considerations of what the economy can support. But for those people struggling to make ends meet, most of whom have not benefitted from one of the most important pieces of legislation introduced by the last Labour government, it will be a helpful step along the way, and crucially, one that does not come at the expense of low paid workers elsewhere.