The Problem of Minimum Wages

Paul Kirby, the former head of No 10s Policy Unit has written on his idea for raising the minimum wage. Here's his justification:-

Before I nail my colours to the mast on the right level for the Minimum Wage, here are some of the reasons why I believe it can be radically increased without backfiring:

1) Low wage earners are, overwhelmingly, providing services for domestic consumers within the UK economy. They work in shops, cafes and hotels. They cut our hair, they clean our houses, they look after our kids and they care for our elderly.  They are not  in manufacturing, competing on the price of their labour with other countries. What they do has to be done in this country. Nor is it tradable with other countries. If the Minimum Wage increases, it impacts equally on all of an employer’s competitors, so there is no disadvantage. 

But what everyone is always doing is competing with others in all but the most essential services. Give me £20 and force me to spend it on a luxury, I'd opt for either a takeaway curry feast, a blu-ray or some kindle books by PJ O'Rourke. Right now, I'd probably go for the first or 2nd choice. But if you raise minimum wage, it's going to push the price of the former up quite a lot, and have little effect on the latter two. Most of the cost of those is going abroad. Raising the minimum wage means that the foreign, automated option looks better.

Even regarding the industries he mentions (and actually, manufacturing does have some min wage jobs, how much does he think cleaners in factories earn?) you can consider the following:-

• Shops - more use of internet shopping
• Cafes - buy a Dolce Gusto machine when you want a nice coffee, use a Costa machine at a garage.
• Hotels - more use of automation such as electronic checking in systems. Cleaners replaced with Roombas.
• Cutting hair - buy a pair of clippers, opt for shorter haircuts to do them less often, have mums doing kids hair, choose the "dry cut" rather than "cut and blow dry" option.

2) Raising the lowest wages does not mean that employers simply have to, or will, just cut jobs or working hours to keep the wage bill constant. The evidence is clear that employers find a variety of solutions.  Firstly, they restrain pay growth for their better paid staff. Secondly, they increase prices to consumers. Thirdly, they improve productivity and get more out of each hour that they are paying for. And then they squeeze their profits. Through productivity gains, they either earn more revenue or cut the amount of labour they need. 

But why do we need a minimum wage for that? If an employer can see it's worth investing in someone to improve productivity, why won't they just do that? The rest is basically garbage with the only correct thing being that it raises prices to consumers (so, yay, inflation!)

3) Increasing low pay has a limited impact on the overall costs of most businesses. In some sectors, very few earn less than the living wage, e.g only 6% in manufacturing. Even in hotels and catering, which is one of the biggests sector for the Minimum Wage, only 17% of jobs are below the living wage and raising the Minimum Wage to the Living Wage would only add 6% to the wage bill. This is the highest impact for any sector. More importantly, labour is only a proportion of all costs, e.g. 25-35% for restaurants. 

So what? It still raises costs. Still means you're going to send more manufacturing jobs abroad. Maybe people decide they'd rather have a dirty weekend in Paris instead of Brighton because it's tipped over into Paris being a better value proposition.

4) The current Minimum Wage is a very low baseline. Since it was created 15 years ago, the Minimum Wage has largely eliminated the exploitative wage rates ( in some cases only £1 per hour) which used to exist. A good, but limited job. But it is now just £6.31 and its value in the last few years has declined. It only covers 4% of employees, just 1m people. This rises to 6% in the North East and falls to 2.5% in London. 

It only covers a small percentage of employees because it's going to only be for jobs around that rate. If someone's labour is only worth £1/hour, their job no longer exists, replaced by either a robot or the work going to China. Or just not happening. Someone isn't going to pay someone £6/hour if the return on labour is £3/hour.

We don't know how many jobs at the £4-5/hr aren't being created.

5) We do not need to continue with a single National Minimum Wage. This has held down the wage to the lowest common denominator. Concerns about the impact in, say, Sheffield have left the Minimum Wage meaningless in London. We can and should have more than one geographically based level. 

No, we just don't need one. Give everyone a citizen's income and let the market sort it out. If someone can afford to live in London because they've got a massive inheritance from their aunt but like working in a Notting Hill bookshop for £5/hour because they can pick up intellectual chicks what's it to you? Why shold they move to Sheffield?

6) The Minimum Wage is an hourly rate, rather than a weekly wage. So it impacts on how many hours an employer wants to buy, rather than forcing a binary decision between hiring someone or not. The same is true for workers deciding how much to work.  Just over a quarter of employees are part-time ( nearly 7m people), but over 5m of these are women. More than 4 out of 10 women work part-time. Hourly rates for part-time workers are much lower than for full-time workers, e.g. the median hourly rate for full-time women is £12.00, but only £8.12 for part-time. So the Minimum Wage hourly rate could be a big deal for part-time workers.

It's the same problem whether you have 2 part-timers doing half a day or 1 full-timers.

7) There are a number of ways that the Government can compensate employers, if it wants to. Increasing wages helps the Treasury. It reduces the cost of in-work benefits and increases taxes. Moving to the Living Wage would make government nearly £4bn better off. For every £1 increase in low wages, the Government will be 50p better off. (Some say less because they have to pay public sector staff more. But I wouldn’t give into this. The public sector has many of the flexibilities of the private sector to soak it up – e.g. restrain pay growth for the better-off or improve productivity). Government could give some or all of this 50p back to employers. This could be across the board (e.g. via a cut in employer NI contribution). Or it could be highly  targeted. There are only two sectors which are seriously challenged by an increased Minimum Wage – retail/wholesale and hotels/catering. A key cost for both sectors is business rates. This could be reduced by a discounted rate specifically for their type of premises. 

But that assumes you've going to keep all the jobs, rather than losing some due to automation and global competition.

7) This is the right time to do it. Growth and optimism are back in the economy. Jobs are growing. Wages are rising. Those with the broadest shoulders were asked to take the strain of deficit reduction (e.g. reducing child benefit to higher rate taxpayers).  It is equally right that as the country gets richer again the poorest of the hard working families gets a bigger share of the new wealth. 

No, there's never any right time for a minimum wage. Not now, not ever, because minimum wages at the most fundamental level are a bad idea. If John is offering Bill £5/hr for his labour and John will pay no more, and no-one else will pay more than John, that is the value of Bill's labour. Saying "well, John should pay more" just isn't going to happen. John won't. You can appeal to his sense of morality or Christian goodness and if he still won't pay more, he won't. So, if you're then going say that John should pay Bill £10/hr, well, maybe John won't bother doing that thing. Or maybe he'll do it himself. Or he'll hire a company in China to do it. It's simply a problem that can't be solved.

Which doesn't mean we think that people shouldn't be looked after or that people shouldn't be living on more than £5/hour, but that's imposing society's moral views on an individual, which is a form of tragedy of the commons. If society wants Bill to live on more than £5/hour, society can pay Bill extra (and use CI rather than incentive-destroying means-tested benefits).

And it troubles me that the ex-policy unit bloke of No 10 can even think like this, and makes me wonder just what sort of cretinous thinking generally goes on in cabinet.