Sunday, April 07, 2019
Britain's minimum wage, 20 years old, is an unlikely success story
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

Today, to take your mind off other things, which will do us all some good, let me talk about a British success story. It has helped prevent low-paid workers being exploited by the minority of unscrupulous employers, it has put a brake on rising inequality and it has not prevented a strong and sustained rise in employment.

It is also celebrating an important milestone; 20 years old this month. I refer to the national minimum wage, now the national living wage for those aged 25 and over. It has just risen, on April 1, to £8.21 an hour, with lower rates ranging from £3.90 for apprentices to £7.70 for 21-24 year olds.

When it was introduced, in April 1999, there were 27m people in employment in the UK, and the employment rate for the 16-64 age group was 71.3%. Twenty years on, nearly 6m more people are in work – the total is 32.7m – and the employment rate stands at a record 76.1%.

I am going to own up at this point to the fact that at two points in those 20 years, I worried that there would be a cost to jobs as a result of this policy. One was when the minimum wage was introduced by Tony Blair’s Labour government, when it risked introducing an unnecessary inflexibility into Britain’s flexible Labour market. The other was after the 2015 election, when George Osborne announced the national living wage for those aged 25 and over, and provided low-paid workers with a significant pay boost, one which had not had the benefit of the expert analysis of the Low Pay Commission.

But, and this is a mea culpa, both Ed Balls, who was instrumental in the introduction of the minimum wage and Osborne, who increased it with the living wage, judged it well.

I remember Balls explaining to me how the government, on the advice of the Low Pay Commission, had chosen the initial level of the minimum wage, £3.60 an hour for those aged 22 and over, by careful consideration of where it fell within the existing wage distribution, Setting it too high, in other words, could have had adverse consequences for jobs. For Labour, the minimum wage was also important as a backstop at a time when tax credits were being introduced. Without it, employers might have passed on too much of the responsibility for workers’ incomes to the state.

Osborne’s living wage, similarly, has not hit employment, far from it, though it has put some sectors under strain, of which more in a moment. But if its aim was to create “an economy that works for everybody” after five years of austerity it may have come a little late.

The success of the minimum wage is set out well in a new report from the Low Pay Commission, chaired by Bryan Sanderson. In the past, the pay of the lowest-paid workers has risen more slowly than those in the middle and at the top. The minimum wage has ensured the opposite, boosting the annual pay of those at the bottom of the wage scale by roughly £5,000 a year.

As Sanderson says of its introduction 20 years ago: “The conventional wisdom of the time was that minimum wages simply forced low-paid workers out of their jobs. But over the last 20 years, the national minimum wage has shown that this is not necessarily the case. It has raised pay for the lowest paid without damaging employment.”

The current living wage of £8.21 an hour would have been just £6.54 had it risen in line with average earnings from that initial £3.60, and only £5.39 had it gone up by the consumer prices index. The UK’s minimum wage, at its inception, was in the middle of the range of OECD countries; now it is near the top.

It covers around 2m workers and its so-called “bite” – the minimum wage as a proportion of the median wage for all workers – has risen from 44% in 2001 to within a whisker of 60% now. While workers overall have suffered a drop of 4% in real wages since 2008, the financial crisis, those on the minimum wage have seen their real wages rise by 13%.

Most striking of all has been the apparent lack of any detectable adverse effect on jobs. Actually, there was good evidence at the time of its introduction that a minimum wage, sensibly set, would not hit employment. The death was announced last month of Alan Krueger, who served as chair of America’s Council of Economic Advisers under the presidency of Barack Obama. Tragically, his family said he took his own life.

In the early 1990s he and David Card published a hugely influential paper, Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania. They had the advantage of being able to conduct a real-life comparison between New Jersey, where the minimum wage went up from $4.25 to $5.05 an hour in April 1992 and Pennsylvania, where it remained constant.

Far from cutting employment in New Jersey, it rose, while in Pennsylvania it fell. There may have been other factors in that fall, but their robust conclusion was: “We find no indication that the rise in the minimum wage reduced employment.”

So is it all plain sailing for the minimum/living wage? I would be failing in my duty if I did not mention that the living wage, in particular, is not well loved by many in some sectors of the economy, notably hotels, restaurants, retailers and, perhaps most of all, the care sector. Added to other burdens, including business rates, the apprenticeship levy and a reduction in the supply of EU migrant workers, it is seen by many as another government impost which makes business more difficult. Though the Low Pay Commission examines in detail the impact of the minimum wage on different sectors of the economy, it is by its nature a blunter instrument than the old sectoral wages councils.

Those vulnerable sectors have to be watched, as do politicians. There is a risk that the minimum wage becomes part of an election bidding war. Labour has pledged to raise the minimum wage for all workers over the age of 18 to the level of what is also called, confusingly, the living wage, though this one is set independently of government and is expected to be at least £10 an hour by next year, according to Labour. Set by the Living Wage Foundation and voluntary, it is currently £9 an hour across the UK and £10.55 in London.

It would be a great pity if the minimum wage were tested to destruction with increases bigger than the market can bear. It has been a British success story.