The National Living Wage experiment

The National Living Wage (NLW) was introduced in April 2016, hiking the minimum wage for those aged 25 and over from £6.70 to £7.20 an hour. At the time, many warnings were heard about the potential negative consequences for employment. However, a report by the Resolution Foundation published last week showed that the minimum wage hike has led to the largest fall in the number of workers on low pay (defined as less than two-thirds the median hourly wage) in four decades – and seemingly without a discernible negative effect on employment. As of April 2017, 5.1m employees (19.3%) were low paid, down from 5.4m (20.7%) the year before – the largest single-year percentage fall since 1977.

All encouraging news, then… But it’s too early to celebrate. Firstly, there are a few issues with the data. The survey measures hourly pay, not actual take-home pay. Any reduction in hours or overtime is thus not accounted for. Similarly, the survey doesn’t measure benefits, though it is claimed that low paid workers have ‘few benefits to cut back on in the first place’. This may be so, but whatever limited benefits there is to cut, this can only happen once. Next step is likely to impact employment.

Secondly, it may be too early to draw conclusions. In a recent post, we addressed the concept of factor substitution, the simple concept of a shift from labour to capital as the relative price of labour rises. This process is obviously not instantaneous – the true impact of minimum wages on jobs creation is measured in the long run. This is exactly what economists Grace Lordan and David Neumark from the US National Bureau of Economic Research did: ‘Based on data from 1980-2015, the evidence shows that a $1 increase in the minimum wage lead to an average 0.43% reduction in low-skilled, automatable jobs. In manufacturing, the reduction was 0.99%. Pertinently, the groups traditionally perceived to be the weakest, and normally found deserving of special consideration, are the first to lose out: ‘these effects […] are larger for the oldest and youngest workers, for females and for blacks’, the study found.

The National Living wage is set to rise further, reaching £9/ hour by 2020. This will put the UK right at the top of the international minimum wage rankings. Nick Boles, Minister of State for Skills at the time of introduction of the NLW, hailed it as ‘one of the biggest increases in the legal minimum wage that any government has done in the western world in living memory’. Professor Richard Dickens from the Low Pay Commission labelled it ‘a social experiment’. We suspect it’s an experiment with a foregone conclusion, no matter what the initial numbers show: as the price of labour goes up, demand goes down. We can expect deteriorating employment prospects for the low-skilled.

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