Last week, the National Minimum Wage (NMW) celebrated its fifteenth birthday. It has not been the disaster some feared – largely because the Low Pay Commission set rates conservatively, taking ability to pay into account – but nor has it entirely helped those it was designed to.

Today, there is pressure to push the minimum upwards. George Bain, the Low Pay Commissions’s first chair, suggests we ought to move towards the Living Wage, a rate set wholly by reference to need rather than its likely employment impact. The Living Wage, at £7.45 nationally and £8.55 in London, is considerably higher than the current £6.19 NMW, and has already attracted support from Ed Miliband and Boris Johnson.

To raise the rate in this way would be a mistake. The NMW has likely slowed the growth of employment in some regions and occupations, such as care services. By raising the cost of hiring further, the policy will only make it more difficult for firms to take on new employees. In particular, it is likely to contribute to the worryingly high youth unemployment rate. The UK labour market has performed relatively well compared with most of Europe. But any substantial increase in the minimum wage would have a negative impact, especially in sectors that employ a high number of low-pay workers.

Take retailing. Already under pressure from high rents, business rates, and growing competition from online sales, the shopping sector is particularly vulnerable. At £6.19, the current NMW is equal to 75 per cent of median earnings in the sector. Recent research conducted for the Resolution Foundation estimates that an increase to the Living Wage would raise labour costs in retailing by about 5 per cent, and by more in hotels and bars. Raising the cost of hiring for these businesses is likely to make it harder for the low-skilled unemployed to find work. By contrast, the cost to the banking sector would only be around 0.2 per cent of their wage bill.

Equally worrying is that the beneficiaries of an increased minimum would not necessarily be those in greatest need. A pay hike would mainly benefit part-time workers and employed young people. It would make it significantly more difficult for new labour market entrants or lone parents to find jobs.

Ultimately, the NMW has not helped those it was designed to, and proposals to increase it will only exacerbate the problem. Some argue for abolishing it altogether. Others propose that the rate be regionalised, recognising that the effect on jobs is much greater in the North East or the North West than in London and the South East. Certainly, if it is to continue beyond its fifteenth birthday, the NMW should not be pushed to a level that businesses cannot afford. Doing so would only penalise those who need it most.

This article originally appeared in City AM.

Len Shackleton 154x154

Editorial and Research Fellow

Len Shackleton is an Editorial and Research Fellow at the IEA and Professor of Economics at the University of Buckingham. He was previously Dean of the Royal Docks Business School at the University of East London and prior to that was Dean of the Westminster Business School. He has also taught at Queen Mary, University of London and worked as an economist in the Civil Service. His research interests are primarily in the economics of labour markets. He has worked with many think tanks, most closely with the Institute of Economic Affairs, where he is an Economics Fellow. He edits the journal Economic Affairs, which is co-published by the IEA and the University of Buckingham.

2 thoughts on “National Minimum Wage turns 15 – but it still fails to help those most in need”

  1. Posted 05/08/2013 at 22:32 | Permalink

    So, we increase the wages of the workers meaning that the employers will have to increase their prices to cover them, meaning that everything costs more, meaning that we need more money in order to be earning a “living wage” meaning that…

    Well, it’s one way to ensure that the economy is totally destroyed within a few decades.

    Ten grand for a bag of sugar anyone?

  2. Posted 06/08/2013 at 11:16 | Permalink

    Anthem, While I don’t support minimum wage laws, your argument is actually flawed.

    If minimum wages rise, the TOTAL effect on prices is not all that much. E.g. of 10% of the workforce are on the min wage, and the min wage rises by 30%, the net effect on prices is 3%.

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