The good and the bad of Labour’s minimum wage plan
Though no panacea for working poverty, a higher national minimum wage is probably right. But Ed Miliband’s announcement that Labour would dictate such an outcome is certainly wrong. Politicians should respect the independence of the Low Pay Commission, and Labour, which set it up, should know that more than others.
One of Labour’s big policy announcements at its conference this week is that, under a Labour government, the minimum wage would rise to £8 per hour in 2020. This is presented as Labour’s attempt to “tackle poverty pay”.
This is not the first time recently that politicians have tried to influence the setting of the minimum wage. Earlier in the year, Chancellor George Osborne said he would like to see it hit £6.50 this year. Vince Cable said something similar.
This attention is welcome, but there are a few points that need spelling out. Firstly, Labour’s target of £8 per hour by 2020 might look modest; 25p per hour per year, a nominal rise of 27 per cent in the six years to 2020 doesn’t seem like much. That is, though, a greater rise than the last six years (13 per cent) and given the OBR expects inflation to be low for the foreseeable future, the effect in real terms could be greater still. So it is a bigger increase than we have been used to.
Secondly, the link between low pay and poverty is not as strong as one might think. The graph below shows where low paid people are in the income distribution. Here, we’ve used the living wage figure of £7.45 per hour. Clearly, there is a cluster at the bottom end. But there quite a large number of low earners in the middle of the household income distribution, due usually to the earnings of their partners. There are also rather a lot of people earning in excess of £7.45 down at the bottom. So they already earn a decent hourly wage, but the total number of hours worked either by them or other members of their family is not enough to move up the income distribution.
Thirdly, the minimum wage is not actually set by government. It is set annually by the Low Pay Commission, through a process involving employers, trade unions and researchers. The aim of this process is to bring consensus to the uprating process, and to balance the needs of low earners against the risk of increasing unemployment. If it is right to point out that introducing the minimum wage did not lead to large rises in unemployment (and it didn’t), then it is also correct to credit the process that brought about that result.
The LPC commissions a range of research into the effects of the minimum wage each year. This research looks at, for instance, the impacts of raising the minimum wage for apprentices on youth unemployment, or the variations in low paid employment across sectors. (Full disclosure – we are currently undertaking analysis of the links between low pay and the benefit system for next year’s report). Looking at the reports published in recent years, it is striking how thorough it is.
Many would think, and we would agree, that a rising minimum wage is a good thing. But the principle of independence is precious. If there is political pressure to increase the minimum wage, why not political pressure to decrease it? In 2014, that’s unimaginable. But in 2004, it would have been unimaginable that a Conservative chancellor would want it to rise quickly.
Labour is rightly proud of introducing the minimum wage. It can be equally proud of the process it set up to oversee and safeguard it – a rare example of an independent, evidence based part of UK policy. There are other things a Labour government could do – broaden the remit of the LPC for instance, and put greater resources into enforcement. We need more institutions like the LPC, and they should be allowed to get on with their work.