Amazon's pay rise and the minimum wage

Amazon CEO Jeff Bezos gave his workers a pre-Christmas boost, which led some to say that everyone else could do with one too. But don't minimum wages cost jobs? Simon Wilson reports.

What has happened?

Amazon has won headlines and praise for announcing that from 1 November it is boosting its company minimum wage to £9.50 in the UK (and a pound more in London) and $15 an hour in the US. That $15 level is more than double the federally mandated national US minimum of $7.25 (a figure that has not increased in more than a decade, though many US states and municipalities have legislated to set higher minimums in a range of around $8 to $12, depending on company size and sector).

No doubt Amazon has good commercial and PR reasons for making the switch (and its hometown of Seattle already has a $15 minimum, a high outlier). There's a tight labour market in both the US and UK, and Amazon is entering its busiest period of the year. Either way, Amazon's move has been hailed by the leftwing Senator Bernie Sanders, who like MoneyWeek is a fierce critic of low pay that forces taxpayers to subsidise corporate profits via top-up benefits. And it has also refocused attention on the whole question of minimum wages.

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What is the UK minimum wage?

It varies according to age. As of April 2018, the national minimum wage for adults aged 25 and over (officially the "National Living Wage" after George Osborne's rebranding in 2016) is £7.83 an hour. If you are 21 to 24 it is less £7.38. If you are 18 to 20, it is a lot less at £5.90. For those aged under 18, the figure is a miserly £4.20 an hour so Amazon's £9.50 is likely to tempt you. And if you are an apprentice, the rate (in your first year) is just £3.70. (In your second year it goes up to the age-dependent rate if you are at least 19 years old. If not, it stays at rock-bottom.)The headline rate of £7.83 is on schedule to hit £9 by 2020, unless Labour takes power before then and fulfils Jeremy Corbyn's pledge to raise it to £10 "within months".

Who's entitled to it?

Anyone who has left school and is over 16 is entitled to be paid the legal minimum, and any work contracts at less than the minimum are not legally binding. That goes for part-time workers, trainees and staff still on a probationary period, casual labourers (or any other kind of worker) hired for just a day, agency workers, workers paid by the number of items they make, workers at sea or offshore, and workers of any nationality. The self-employed and company directors do not qualify. Nor, oddly, do members of the armed forces, or students on work placements, or au pairs.

How does our rate compare globally?

Not stellar, but not too bad. In 2017, according to statistical analysis by the OECD of 32 rich and emerging economies, the UK's minimum wage ranked as ninth highest (sandwiched between Germany and Canada). Topping the chart were Australia, Luxembourg and New Zealand, who pay around 20% more. Other countries having a higher rate than us were France, Ireland, the Netherlands and Belgium. (The OECD compares wages converted into US dollars at 2017 averaged exchange rates. It also calculates the stats based on purchasing power parity. On this measure, the UK still lies ninth, but France moves up to second place, and Germany climbs to fourth.)

Has our position changed over time?

The UK minimum wage has risen by decent amounts in recent years, but other countries have raised theirs too so Britain has stayed around the ninth position since the start of the century (on the OECD analysis). Another way to compare countries is to look at minimum wages as a percentage of the average wage a statistic that is arguably a proxy for "fairness". The UK's minimum has risen steadily from 41% in 2000 to 54% in 2017. That figure puts the UK down in 14th place but we have set ourselves a target of 60% of median earnings by 2020. That would put us near the current top, though just shy of the 62% France has been rating for years.

Does the minimum wage work?

The minimum wage is supposed to alleviate poverty, although it is hardly a panacea in this regard. One fundamental problem is that it targets low-wage workers, rather than low-income families, which is not always the same thing. Many low-income families have no workers at all, and some low-wage workers are members of relatively well-off households. More fundamentally, many economists argue that minimum wages do nothing to temper poverty because they prompt employers to cut back on hiring as labour costs rise, denting employment. The Conservative party used to oppose a minimum wage for this reason, before embracing it a few years ago as a means to reduce taxpayer subsidies for companies whose workers were poorly paid and thus needed government help through tax credits.

Do minimum wages cost jobs?

There's a vast academic literature covering this question, much of it confused and contradictory. Last year, for example, two much-publicised studies of the (high) minimum wage in Seattle came to opposite conclusions. The best answer to the question is: probably, a bit, and especially for the youngest and lowest-skilled. The majority of academic studies tackling the question (around two-thirds of them, according to David Neumark, an expert who surveyed the literature) have concluded that minimum wages do indeed have a marginal negative impact (though not necessarily a statistically significant one) on employment.

Economic theory tells us that if you put up pay, you will cut demand for labour, and reduce the overall number of jobs. And common sense tells us that there must be a level beyond which, if you tried to push up the minimum too high, it would cause serious adverse effects. Yet the UK's experience since 1999, echoing that of many other countries, is that a wage floor appears compatible with sustained high employment. Minimum wages look like they're here to stay and will be debated for years to come.