It's time to raise the minimum wage

Here's a mad-sounding idea to cut the budget deficit: increase the minimum wage by 30% or so.

What would you do if you were the Chancellor and you'd just announced that halving the UK's annual budget deficit was "non-negotiable"? There are a few things I think we'd all get sorted in a hurry. We'd cap all public sector salaries at, say, £175,000. We'd cut all benefits to the middle classes. We'd try and make the tax system flatter and less complicated (how hard can it be?). And we'd ban management consultants.

But then what? Here's an idea. How about we increase the minimum wage by 30% or so, making one hour of basic work worth £7.50 and a year's work on the minimum wage (assuming a 40 hour week andfour weeks paid holiday) worth £15,600, rather than the current £11,856.

It might sound mad at first, but it does make some sense. The current minimum wage is not a living wage. Pretty much everyone on it has to have their income topped up by the state (via tax credits and so on). That means the taxpayer has to subsidise the bottom-of-the-pay-rung employees at our supermarkets and fast-food outlets. And that, in turn, means we are subsidising our supermarkets and fast-food outlets. They keep their profits high, in part, by paying low wages. That's something they can only get away with because the welfare state picks up the slack. The profits then go to their shareholders and the taxpayer gets left to top up the wages.

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Doesn't sound quite right does it? So why not make the companies pay living wages, stop the state subsidies and cut the benefits bill in the process? Raising the minimum wage might also finally provide some incentive for the long-term unemployed to get back into work. I wouldn't give up my housing allowance and benefits to take an unsecure job on £5.80 an hour. But I might for £7.50 an hour.

Long-term unemployment is very expensive (think drugs, crime and the social impact of multi-generational workless families) so reducing it can only be good for the deficit (to say nothing of the long-term unemployed).

Finally, it is well documented that the poor spend a higher proportion of their income than the rich. So pretty much everything that we might make, say, a supermarketpay its employees would end up being spent probably in that same supermarket. That's good for the economy too.

The objections to this are obvious. It isn't very free market. Firms forced to pay high wages might go bust. It'll make it hard for us to compete with foreign labour. But I'm not sure any of these arguments are good enough. Our labour market isn't free anyway (it is distorted by our benefits system). Firms that can't afford to pay living wages or that depend on cheap labour probably shouldn't be in business anyway. If you operate in a developed country but can't afford to pay your workers enough to allow them to live in a developed country, are you a proper business or a state-subsidised job creation programme? And we shouldn't be competing globally on the cost of labour in the first place it's far too late for that.

Right now I'm very glad I'm not the Chancellor and very glad I never will be. But if I were, I think I'd at least run the numbers on the minimum wage.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.