Put a lid on the minimum wage

It was a clever ruse by the former Chancellor, but the National Living Wage now risks our prosperity.

As a clever gimmick, it probably seemed like a good idea at the time. At the end of his Budget speech in 2015, which turned out to be his penultimate one before he left office, George Osborne, the then chancellor of the exchequer, rebranded the minimum wage as the National Living Wage. Stealing some clothes from the Labour Party, it was designed to make sure every employee was paid at least 60% of average earnings by 2020.

At a time when wages were stagnant, the economy was still climbing its way out of deep recession and there was little sign of living standards rising, it seemed a fairly simple way of making sure the country’s wealth was shared out a little more equally.

This week saw the most significant rise to date. The minimum for an adult worker will go up from £7.50 an hour to £7.83, a 4% year-on-year increase. But is this really the right thing to do?

Defying economic gravity

Basic economics would suggest that minimum wages increase joblessness. Yet when the Labour government first introduced one in 1997, this didn’t seem to be the case. If there was any impact on unemployment levels, you certainly couldn’t see it in the statistics. Unemployment kept on falling to near record levels.

Indeed, in the last few years, the figures have been even more telling. The minimum, and now the living wage has been steadily rising, but at the same time employment levels have been hitting record highs. It is easy to see why politicians could start thinking they could easily give the low paid a pay rise.

Yet things might be starting to change. Take retail, for example. A total of 2.8 million people work in that sector. And right now, the industry is getting wiped out. Toy R Us has gone into administration and so has electronics retailer Maplin – and those are just the latest examples.

Dozens of chains have collapsed and probably many more will over the next few years. Online competition and punishing business rates are part of the explanation. But so is the living wage. Shops have to employ a lot of staff. If their wages go up, that may well tip a company over the edge.

Or take restaurants and hospitality. That sector employs 2.9 million people, again one of the largest in Britain. It has grown in the last few years as restaurants and coffee shops have dominated town centres. Yet just like retail, it is now in trouble. Major chains like Prezzo are closing outlets, and a few are going out of business altogether. Sure, there are plenty of explanations for that, from higher taxes to over-ambitious financing from private-equity owners. But staff are the major cost. It is hard to believe that a rising living wage is not part of the problem.

Likewise in care homes. The total number of adult social-care jobs comes to 1.6 million. Many of the staff are on the living wage. Once again, lots of the chains have been running into financial problems, and homes have been closing. Financing is partly to blame. But so are wages.

You can’t legislate for higher wages

Of course, everyone wants to see higher wages. But the truth is you can’t legislate for them. Relatively modest minimum wages don’t make much difference. If it is set roughly at a level that employers would pay anyway, then all it does is punish a few unscrupulous bosses. But when they get too high they can start to do real damage.

There is plenty of evidence emerging of what happens when the basic economics of supply and demand are ignored. In the US, for example, Seattle has been pushing through a $15 per hour minimum wage. But the evidence shows it is destroying jobs even in a booming city such as that.

The evidence is starting to point to the fact that the living wage is doing the same here. The way to lift wages is to raise skill levels, improve productivity and lower taxes. Just increasing wages by law only destroys jobs, and tips otherwise viable businesses into bankruptcy. It is too late to reverse this week’s hike in the living wage. But it should be the last one in a while.