Put a lid on the minimum wage

George Osborne © Rex Features
George Osborne: he stole Labour’s clothes

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.

  • Jordan Geldart

    Strange. In the article you say that there is no evidence that the minimum wage has caused job losses, at least not enough to show up in the statistics. You then go on to state we must stop increasing wages because it will cause job losses.

    Seems you have an ideological view that wont be swayed by mere facts.

    • Kate Morgan

      How about a maximum wage, so people who add very little value to our society, such as journalists, politicians and bankers, can’t continue to bleed the world dry of it’s resources and then blame the poor for it?

      • Deco

        There is no such thing as a “maximum wage”, it was a term coined up by conservatives to attempt to prevent the implementation of the minimum wage.

        Humans are naturally greedy creatures, in other words – businesses and corporations will want to pay people as little as possible, both to save money and to raise profits – the idea of a “maximum wage” flies in the face of this, and sounds good in theory but when put in reality fails.

        If anything the minimum wage has to be raised, or taxes need to be – people are working full time yet have to rely on taking out debt to cover monthly bills, also known as the working poor.

      • Glass Beach

        until the current world order swings towards socialism then unfortunately these chancers will continue to leech the masses along with their super-rich masters

    • FriarStuck

      Why do you think youth unemployment is so much higher? Could it be that minimum wages make unskilled and entry level jobs a net cost to businesses, and therefore uneconomic.

      This is not just a UK problem, we see it Europe wide.

      I would be interested to see a graph of minimum wages, per country, correlated with youth unemployment rates.

  • Cameron Holder

    The problem right now is that the government didn’t look at the big picture. I’m quite supportive of raising minimum wage but when you add apprenticeship levy and the business rates re-evaluations there has been a lot of cost pressure for businesses at the same time.

    The government needs to step back, look at the whole picture and drop some of these extra costs.

  • Glass Beach

    the retail cull we see on the high street is a function of international corporates who domicile such to pay virtually no taxes, operate from relatively cheap warehouse premises, rely heavily on robotics and therefore gain a massive advantage over traditional retailers i.e. all the benefit go to the owners/shareholders and not the countries/communities they operate in.

    the answer surely must be in a complete modernisation of our taxation system to ensure such companies pay their fair share in the societies they operate (levelling the playing field somewhat) and not further attacks on those hard working people on the edge financially.

    • disqus_x5UmkDRb7H

      The retail cull is also a function of a move to the internet. As bank branch closures were. Hospitality closures are a result of too many people expanding in the same area at the same time, trying to ride the wave. Schumpeter explains that such destruction is necessary to facilitate the next wave.
      As time goes by and it is happening already, low skilled jobs will be automated. eg McDonalds let you order and pay without seeing someone, self serve tills in supermarkets etc etc. So those on the minimum wage will either move up the value chain by increasing their skillbase, or settle for a life in a future Minimum Income Guarantee scheme. Which will bring its own issues.
      As for the tax issues, a sales tax would hit Starbucks etc and Google would have no incentive to cheat UK by basing themselves in Dublin.

  • LG

    Switzerland has far, far higher minimum wage rates. Doesn’t seem to have done any harm there.

  • FriarStuck

    Why do politicians pontificate over the rate, why not set wage levels to £100 per/h, £1000 per/h, or whatever, set the level high enough and we could all live a life of leisure?

    Jeremy Corbyn is just plain miserly, and mean, when he announced that he wanted to set the minimum wage to £10 per hour.

    He clearly doesn’t care about poor people.

    With the simple stroke of a bureaucrats pen, poverty and want, would be a thing of the past…..hard work, thrift, invention, and toil, are simply not required.

    • LEWIS WRIGHT

      Simple answer from a simpleton!

      • FriarStuck

        Nope, satirical answer, pointing out the absurdity of minimum wages.

        Bureaucrats can never create wealth and production by shuffling bits of paper, (although they can destroy it).

        And no minimum wage policy will ever help the poor (although it will destroy low skill, low productivity jobs for people with little skills and work experience, and any method by which they can progress).