Maximising the minimum wage

8 October, 2007

You know that bit of the conversation “So what has the Labour government done for us apart from laying waste to the middle east?” Generally the minimum wage crops up somewhere along the line.

The LSE Centre for Economic Performance has done an interesting study on this very subject. Its available here but the hightlights are available below. I would urge you to have a look at the full report as well. There’s a good graph about the numbers of workers actually effected by the minimum wage which are rather small and lend weight to the argument that if we increased it at a faster rate the world would not end.

  1. The National Minimum Wage is one of the most significant labour market interventions that the Labour government has made, raising the pay of well over one million low paid workers by about 15% overnight at the point of introduction. Since 1999, the minimum wage has been increased by 30% after adjusting for increases in the retail price index, well above the increase in average earnings over this period.
  2. Prior to its introduction, there were claims that it would not only destroy up to two million jobs but also push up inflation and interest rates as better paid workers sought similar pay increases to their low paid colleagues.
  3. None of these fears have materialised. So far, there is no evidence of significant job losses for the workers most affected by the minimum wage and there have been no obvious knock-on effects on the wages of better paid workers.
  4. The political controversy surrounding the minimum wage in the 1990s has now been transformed into a consensus. In the 2005 General Election campaign, the Conservative Party promised that, if elected, it would implement the government’s recommendation for a minimum wage of £5.35 an hour by 2006.
  5. Wage inequality has not fallen since 1997, but it almost certainly would have risen by more without the introduction of the minimum wage as wages of high paid workers continue to rise strongly.
  6. Many of the poorest households will not be affected by the minimum wage because they do not have anyone in work. In addition, many of those who benefit, such as second earners and teenagers living at home, do not live in poor households. So the minimum wage is a very blunt tool for reducing poverty.
  7. The minimum wage is part of a wider package of welfare to work reforms designed to ‘make work pay’. The centrepiece of these reforms is a tax credit that boosts low wage workers’ take-home pay. The minimum wage is an integral part of these reforms because it stops employers from cutting wages knowing that workers will not be any worse off.
  8. I would be interested to find out how the minimum wage has effected peoples attitudes to productivity. Are managers willing as the price of labour rises to value it more highly by investing more heavily in capital?

    Additionally I would agree that you can’t look at the minimum wage on its own. You have to look at the total package, working tax credits, increasing skills and increased help to get people into work.

    If voluntary organisations are more effective at getting people into work then we should certainly be thinking about expanding their role. Though I see this as an opportunity for the trade unions or the charitable rather than the religious sector.

    We should be moving in the direction of a living wage. It took the Labour movement a century to achieve a minimum wage lets hope that a living wage is not so far in the future.


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