Why is minimum wage in the news?
Many people are raising fears the UK's minimum wage may now be too high. Worsening youth unemployment and Alan Milburn's landmark report on “Neets” (young people who are not in employment, education or training) have sharpened concerns that the UK's relatively generous minimum wage and the gradual levelling up of lower youth rates to match the prevailing adult rates, are damaging overall employment – particularly among young workers.
Tony Blair – whose government established the minimum wage – has argued that recent rises have created headwinds for businesses. And within Labour, according to The Guardian, a split has opened up between those who want to slow the pace and those eager to press ahead with rises and age-convergence.
How much is the minimum wage?
In April the minimum wage for all workers aged 21 and over rose 4.1% to £12.71 an hour. This rate is known as the “national living wage”. It only applies to that adult age group and its level tracks two-thirds of median earnings. The rate for 18- to 20-year-olds is lower, but jumped 8.5% to £10.85. And the rate for 16- to 17-year-olds, or for apprentices, rose 6% to £8.00. These bigger increases for younger workers are due to the government's aim of gradually levelling up the youth rates to a single adult tier – a continuation of Conservative policies. In 2016, the Tories created the new premium national living wage tier for those aged 25 and over at the rate of £7.20 per hour. Subsequent governments then cut the age requirement for that top tier, to 23 years in 2021 and then down to the current age of 21 in 2024 – all the while increasing the headline rate.
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About 1.7 million people get the national living wage, or about 6% of the workforce aged 21 and over – about twice as many as when the national minimum was introduced in 1999. Among workers under 21, the proportion is far higher – at about a fifth. Since its creation under the first New Labour government, the UK's minimum wage has got dramatically higher in real (inflation-adjusted) as well as cash terms.
Isn't that a good thing?
MoneyWeek has long been in favour on the grounds that taxpayers should not subsidise corporate profits in the form of tax credits for the working poor. The higher the wages, the fewer the benefits that have to be paid out. The other main arguments in favour are ones of social justice. Income distribution has become more skewed towards the rich in recent years, increasing inequality and potentially undermining the social solidarity that makes capitalism sustainable in the long run. Proponents argue that a minimum wage can help to arrest this trend. Some economists also argue that minimum wages boost productivity, especially in the service sector, though the evidence is contested.
Does a minimum wage destroy jobs?
Above a certain point, for sure. The question is where that point lies. Orthodox economic wisdom suggests that compulsory high pay levels will destroy jobs by disincentivising firms to take on workers. But the history of minimum wages since the 1990s has been far more encouraging than that. Landmark US research on fast-food pay rates (by economists David Card and Alan Krueger in 1994) shifted the dial in terms of the academic debate: it found that a minimum wage did little to dampen employment. A raft of further studies came to similar conclusions, and by the early 2000s the literature indicated that a 1% increase in wages due to a higher minimum wage would lead to a 0.5% decline in employment. “By the late 2010s the effect had fallen to around zero,” says The Economist. The politics changed, too. As the UK's national minimum was gradually increased without causing unemployment to grow, the Conservatives dropped their initial opposition and backed the policy.
What's the issue with minimum wage now?
The core issue is that the rate has now jumped so high. The UK has leapt from being relatively cautious – in terms of the minimum-wage level as a proportion of median wage – to being the most generous of all the big economies (from 45% in 1999 to 67% now). Most of the UK's historical experience and evidence relates to a period of low interest rates, low inflation and low unemployment – and involved a minimum wage at around 45%–55% of median earnings, not 67%, the target introduced by the Tories in 2019. That jump, and today's worsening macroeconomic picture, makes it far harder to be sanguine about the wage's effect on job creation in future. At the same time, there's been a counter-revolution among economists. Several influential US studies from 2022 onwards found that higher minimum wages – a phenomenon seen across many developed economies over the past 25 years – have indeed hit job levels, and damage the employment, income and overall welfare of precisely the low-income workers they are meant to help.
What can be done?
A sensible start would be to freeze the rates for the rest of this parliament and take back control of setting the rates from the Low Pay Commission quango, says Rishi Sunak in The Times. In addition, future rises should be linked to gains in productivity – the national living wage is up by almost a third in real terms over the past decade, while productivity has only increased by 6%. That's obviously unsustainable and the latest unemployment numbers show the effect – the fall in both vacancies and payroll numbers is concentrated in retail and hospitality, which is where a third of all minimum-wage jobs are, and which account for almost half of all jobs held by the under-25s. “Shamefully, and in a reversal of the historical norm, we now have higher youth unemployment than the EU average.” And at least in part, that's because we are knowingly pricing young workers out of the labour market. Let's stop.
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