The real minimum wage is still zero

The UK labour market has a persistent malaise: low productivity and the resulting anaemic wage growth. This has been a feature of the British economy since the Great Recession but luckily, from the 1st of April our government has finally solved it (why they didn’t do so earlier is anyone’s guess). What they have done is of course raise the minimum wage (now called the National Living wage). The causality is actually the other way around; you see… higher wages leads to higher productivity. The government is banking on companies investing in technology to justify the higher wages. They believe labour has been too cheap, discouraging investment in labour saving technology and depressing productivity. That is not completely mad, but what is mad is assuming that the impact on unemployment will be negligible. The government are themselves saying that companies have been substituting labour for capital – now it will be the other way around.

The motivation is partly to reduce the working tax credit bill, where the government tops up low wages to make work pay. This has spiralled out of control since its introduction in 2013. But the Chancellor also did it because ‘Britain deserves a pay rise’… well, if it was only that simple…

Any marginal increase in the minimum wage will cause layoffs (the Office for Budget Responsibility estimates that the effect of theNational Living Wage will be a cut in total hours worked of 0.4%). And it is the weakest workers who will lose their jobs, as the minimum wage forces them to charge more for their labour than what they can contribute to the production process. For some, unfortunately, the alternative to low pay is no pay. Just in itself, redundancy impacts the labourer’s self-worth and isolates him from an important social network, but of course an unemployed labourer will then have to claim benefits, which will be lower than what he was making before – and which pushes the cost of his livelihood onto the tax payer. The increase in the minimum wage has thus resulted in others having to pay the labourer less for doing nothing than he was paid before for doing a job. Everybody loses. George Osborne has already given councils green light to raise taxes to fund the expected increased cost of social care.

And there are other problems. An increase in disposable income without a matching increase in productivity can only result in the additional demand pushing prices up (this is the well-known wage-price spiral). Within a business, which now has to increase pay for its lowest paid employees, perverse effects arise on top of the increased wage bill: employees on a higher rung of the corporate ladder will look on unimpressed as other’s wages are increased. Incentives to strive for promotion are reduced.

That’s not to say that there are no winners from increasing minimum wages. A portion of workers will certainly see their wage increase as the market clears at a higher price. Those under 25, to whom the new Living Wage does not apply, will be relatively more attractive. But the biggest advocates for high minimum wages has always been the unions and their political mouthpiece, the Labour party. Why would unions, often representing skilled labour on wages above the proposed minimum wages, be so concerned? Well, say I can choose between hiring two unskilled labourers or one skilled (and unionised) one to do a job. Now, increase the minimum wage, and the price of the unskilled labourer goes up. The unionised, skilled labourer, who was already making more than minimum wage is unaffected – though actually, not quite… his competitive situation has changed: the unskilled alternative is now more expensive. Push the minimum wage up high enough, and he will never have to worry about unskilled competition ever again.

Labour, in the pockets of the unions, will never speak up for the truly vulnerable in this debate. They will continue to peddle the nonsense that wages can be determined by political dictate. It is sad that the Tories are playing along.

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