Sir George Bain, one of the chief architects of the minimum wage has said that the New Labour flagship policy is no longer working – and he has got a point. The minimum wage has lost its value over the years as inflation has outpaced median pay in the UK causing millions to be earning less than the accepted ‘living wage’ needed for a basic standard of living. There are signs of an economic recovery sprouting, which is giving Conservative politicians reason to be cheerful but whilst ‘Plan A’ might be showing signs of ‘working’, the reality for a lot of workers in the UK is that they themselves are still ‘hurting’. Inflation continues to rise, wages are stagnating and living standards are dropping – this is no reason to celebrate.
It is people that are at the bottom of the pay scale that are affected most during times of economic uncertainty and undeniably more should be done to help ensure their financial security. There is a general consensus that the status quo is trapping low wage earners in an unsustainable and unacceptable position, however the current popular solutions from across the political spectrum could not be more disparate and neither offers an effective solution likely to be implemented any time soon.
One oft given resolution to this problem is to enforce businesses to raise the minimum wage to the rate of the ‘Living Wage’ as determined by the Living Wage Foundation – which would mean workers would be paid £7.45/h as opposed to the current £6.19/h. Admirably, there are over 200 UK companies that already pay workers at this rate voluntarily and the idea has cross party support – it has been backed by both Boris Johnson and Ed Miliband.
However, the idea of a living wage is condemned for ‘raising the ladder’ to the jobs market – making it more difficult for low paid or un-skilled workers to get employment. Using basic economic theory it’s easy to conclude that setting a minimum value for someone’s labour drives up the costs of running a business – it makes employers less likely to employ more people thus pricing people out of the market. Raising the minimum wage would on the one hand be beneficial to workers in employment putting more in to their pockets however it would have wider detrimental implications by adding another barrier to the unemployed. It’s pretty reasonable to lobby large multi-national corporations with booming profits to chuck a couple of extra pennies towards their workers, but when you consider small and medium-sized enterprises account for between 60 and 70 per cent of jobs in the UK economy – demanding these businesses that are already struggling in the current economic climate to cough up more seems pretty counter productive.
Instead of pressuring for a higher minimum wage, the opposite argument is to scrap the minimum wage altogether in order to liberalise the jobs market, encourage businesses to employ more people and make it easier for people to get their first crucial step on to the jobs ladder. It’s a straightforward, simple argument – if employers could pay some workers lower than the artificially high amount set by the minimum wage then they could hire more workers and reduce unemployment. It’s easy to regurgitate a Milton Friedman talk and assume that if the minimum wage was scrapped all our economic woes would go away – it’s good on paper but sketchy in practice.
Numerous reports have refuted the link between the minimum wage and unemployment showing that no conclusive point can be made either way. However, what can be concluded is that scrapping the minimum wage may liberalise the job’s market but it’s almost certainly going to end up with the lowest paid with a lot less in their pocket and will further bloat the welfare bill as government will have to compensate for this. With costs of pretty much everything going up, it makes little sense to hit the most vulnerable in society with another economic gamble when the results are so inconclusive.
The jury is out about what to do with the minimum wage and neither of these proposed solutions are likely to appear in any mainstream political parties manifesto anytime soon. So if the answer is not to raise the minimum wage and it’s not to scrap it, then surely the answer can lie somewhere in the middle? This interesting report by the Adam Smith Institute recommends an alternative that avoids the pitfalls of the main popular alternatives and exposes the elephant in the room – the post-tax earnings of a worker on the ‘Living Wage’ is painfully close to the pre-tax earnings of a worker on the National Minimum Wage – this fact should not be overlooked and it’s a tragedy that it is. A full time worker earning the national minimum wage currently earns £12,875 a year before tax and the current rate for a full time worker earning the agreed ‘Living wage’ after tax is £13,355. By increasing the tax-free threshold to levels around £13,000 and taking minimum wage earners out of tax altogether, the government would effectively allow low paid workers to earn a living wage without forcing greater costs on businesses. It really is one of the biggest and greatest elephant sitting in the corner of the HM Revenue & Customs Tax office.
It is time the debate over the minimum wage moved on from the simplistic “raise it / scrap it” arguments and considered this alternative. The scale of low pay in Britain is a national scandal but it is an even greater scandal that a living wage can be delivered without hurting businesses and no one in power seems to care.