Sunday, March 27, 2016
A big rise for the low paid - will it cost jobs?
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

On Friday this week, the biggest government intervention in wage-setting since the introduction by the Blair government of the minimum wage in 1999 will occur.

The national living wage of £7.20 an hour for the over-25s will come into force. It is, curiously, exactly double the original minimum wage of £3.60 an hour of April 1999. More importantly, it is 50p an hour, or 7.5%, above the existing minimum wage of £6.70 an hour.

It seems a long time since George Osborne announced his version of the living wage in his post-election budget last July. Iain Duncan Smith, who had apparently not been told in advance, celebrated with some energetic fist-pumping on the floor of the House of Commons. It was probably the moment of maximum togetherness between the chancellor and the former work and pensions secretary.

Incidentally, there has been far too much excitement about the supposed “black hole” in the public finances following the abandonment of the disability cuts that supposedly provoked Duncan Smith’s departure. £4.4bn between now and the end of the parliament and £1.3bn in 2019-20 does not constitute even a pale grey hole. There are many much larger challenges on the chancellor’s rocky road to a budget surplus, not least the questions of whether he will ever raise fuel duty and the cost of further raising the personal tax allowance and higher rate threshold.

But back to the living wage. It was, in many ways, a curious policy announcement from a Tory chancellor. At the time I noted that had the election turned out differently, and the living wage had come from Ed Balls in an Ed Miliband government, the response might have been quite different. Many in business, and many commentators, would I suspect have said that it was an intervention that showed how little Labour understood how the economy really worked.

Politically, too, what some saw as Osborne’s masterstroke – seizing the centre ground from a wounded Labour party – can now be seen as jumping the gun. At the time, most thought that Jeremy Corbyn’s candidacy for the Labour leadership was a curiosity and that one of the mainstream candidates would win. It was not, so Labour left the centre-ground of its own volition. The chancellor had no need to muscle in to push it aside.

The other thing about the national living wage announcement, which speaks to some of the recent criticism of Osborne’s approach, is that it was deliberately intended to shock and awe. This was the rabbit out of the budget hat. There was thus little consultation ahead of it. Anybody who has read the Low Pay Commission’s deliberations on the minimum wage will know the careful analysis that goes into them, including detailed assessments of the impact on different sectors of the economy.

No such detailed analysis preceded the living wage announcement. Some sectors, including care homes, domiciliary care, cleaning, and parts of retailing, catering and the hotel trade are exposed. Others, except to the extent that they use the services of some of these exposed sectors, are not much affected. When governments have intervened in pay-setting, way back to the wages councils that were eventually abolished in 1993, they have taken into account these sectoral differences.

Even within the affected sectors some will be more exposed than others. Certain employers have taken steps to trim elements of pay, such as overtime rates, ahead of the introduction of the living wage, in order to control the pay bill. Others have embraced it. Whitbread, for example, says it will pay above the national living wage to all its Costa and Premier Inn employees, even those aged under 25 and apprentices. The British Retail Consortium (BRC), on the other hand, cited the living wage as one of the factors in its prediction of 900,000 retailing job losses by 2025.

The most vulnerable employers (and employees) are probably those in the care sector, caught between rising wage costs and squeezed local authority budgets.

So what will happen? One certain effect is that the living wage will provide a significant boost for the lower-paid. A Resolution Foundation analysis, out today, shows that, in combination with October’s rise in the minimum wage, people on the lowest rung of the pay ladder will have seen a 10.8% rise in pay once the living wage comes in this week. That is four times the increase in pay for workers as a whole, and it is not a one-off.

Resolution expects the lowest-paid to enjoy a 5.7% average annual pay rise between now and 2020, compared with a 3.7% workforce average (which looks optimistic). The living wage will, says Resolution, provide an immediate boost to 4.5m workers and “make significant inroads into tackling Britain’s low pay problem”.

Will it cost jobs as the BRC and others fear? The issue came up at the Royal Economic Society’s annual conference at Sussex University last week. If I were to sum up the position among economists who have researched this, always a tricky thing to do, it would be that the adverse employment consequences of minimum wages have been overestimated in the past – job losses were expected to be bigger – and that the same will probably be true of the living wage. The Bank of England, for example, expects it to add only 0.1 percentage points to overall pay growth; not enough to cost many jobs.

But this is an uncertain area. A new survey of economists carried out by the Centre for Macroeconomics, which I take part in and which encompasses the universities of London and Cambridge as well as the Bank and the National Institute of Economic and Social Research, is on this very subject.

It shows that by two to one, 57% to 33%, economists do not expect the living wage to lead to significantly lower employment. More convincingly, by 76% to 11%, they believe it will have only a muted effect on wages and prices across the economy as a whole.

We should not, however, be too complacent. The fact that many economists do think the living wage will lead to sizeable job losses is a worry. So is the fact that, while researchers agree that introducing a minimum wage at an appropriate level and increasing it gradually does not have a big employment cost, the chancellor may be testing that theory to destruction. A 10.8% pay rise for the lower paid at a time of zero inflation is big in anybody’s book.

So Friday sees the start of an experiment. The hope has to be that employers can absorb the increase in wage costs, or neutralize it by achieving productivity improvements. It will be good for everybody is that is also the reality. But that is not guaranteed.