If the minimum wage cannot be scrapped, at least make it predictable

In social policy debates, collective memory is extraordinarily short-term. Once a transfer instrument has been around for a few years, it becomes part of the furniture, and anyone proposing it should be trimmed can expect to be portrayed as an uncaring rogue.

This winter, when the IEA published a paper proposing to limit non-means-tested age-related benefits, a flood of hate-mail to the authors followed. One elderly commentator accused the authors of trying to force the deprivation suffered during World War 2 on today’s pensioners. One would have thought that if somebody’s memory goes back far enough to remember World War 2, they would also remember that most of the benefits involved did not even exist until the late 1990s.

The recent debate about exemptions from the minimum wage has shown that the story of the latter is a similar one. Most people would probably agree with the idea that members of a disadvantaged group should be given a chance to shine, even if at an initially low pay. But one worry that came up repeatedly in the debate was that exemptions were a slippery slope: if you start exempting one group, where does it end? If it works, will the next debate be on an exemption for people above a certain age, single parents, ethnic minorities and so on?

Thus, the minimum wage has become credited with an achievement that even most of its initial supporters would not attribute to it: pushing up wages across the board. The measure was supposed to provide a safety cushion for a small, vulnerable group of people with very little bargaining power in the market, not a tool to improve living standards per se.

Under these circumstances, outright abolition is probably not politically feasible at the moment. But with unemployment and especially youth unemployment stagnating at elevated levels, the issue cannot be entirely ignored either. It would, however, be possible to mitigate the anti-employment effects of the minimum wage to some extent without causing major controversy. One aspect of the minimum wage in the UK is that it has been raised in real terms almost every year since its inception. This stands in sharp contrast to its US counterpart, which can stagnate or even fall in real terms for years. Over the past decade, the UK minimum wage has been rising not just faster than inflation, but also faster than full-time wages at the lower end.

The minimum wage vs. full-time hourly wages at the 10th percentile

Surely, this unpredictability must exacerbate the effects on employment. Suppose you are prepared to hire somebody at a wage rate of up to £6.20 an hour. The minimum wage, which will be raised to £6.08 shortly, would not be a deterrent as it stands. But there is also a realistic chance that the rate will be raised beyond your maximum willingness to pay in the next round, when you have already committed to an employment contract.

If scrapping the minimum wage is not politically feasible at the moment, then at least it should be made predictable. One way of doing this is creating an automatic uprating formula which cannot easily be changed. The rate could be pegged to hourly wages at some lower percentile (the 10th, say) of the regional wage distribution, thus effectively regionalising it and removing it from political discretion.

This would not solve the fundamental problem that some people are effectively banned from working. But for the borderline cases, it could still make a big difference.

Dr Kristian Niemietz is the IEA's Head of Political Economy. Kristian studied Economics at the Humboldt Universität zu Berlin and the Universidad de Salamanca, graduating in 2007 as Diplom-Volkswirt (≈MSc in Economics). During his studies, he interned at the Central Bank of Bolivia (2004), the National Statistics Office of Paraguay (2005), and at the IEA (2006). He also studied Political Economy at King's College London, graduating in 2013 with a PhD. Kristian previously worked as a Research Fellow at the Berlin-based Institute for Free Enterprise (IUF), and taught Economics at King's College London. He is the author of the books "Socialism: The Failed Idea That Never Dies" (2019), "Universal Healthcare Without The NHS" (2016), "Redefining The Poverty Debate" (2012) and "A New Understanding of Poverty" (2011).

3 thoughts on “If the minimum wage cannot be scrapped, at least make it predictable”

  1. Posted 08/07/2011 at 07:30 | Permalink

    The simplest thing that could be done in the short term to mitigate the negative effects of the minimum age would be either to increase the employers’ NI threshold, or reduce employers NI rates, so that the cost of employing people is reduced.

  2. Posted 08/07/2011 at 11:28 | Permalink

    Agreed. At an employer NIC rate of 12%, a minimum wage of £6.08 is really a minimum wage of £6.81.

  3. Posted 08/07/2011 at 11:59 | Permalink

    Indeed. Given that NI is no longer insurance in any meaningful sense it is simply and solely a tax on employment. Anyone suggesting such a tax today would be laughed at by people right across the political spectrum.

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