Labour Market

The minimum wage is broken

While welcoming George Osborne’s emphasis this week on raising employment, I have some caveats about his target – to have the highest employment rate in the G7. This isn’t hugely challenging. Those in employment currently amount to 71.2 per cent of the UK population of working age, well ahead of Italy (55.5 per cent), France (64.1 per cent) and even the USA (67.4 per cent). Germany, at 73.5 per cent, is the current table-topper and the one Mr Osborne aims to overtake.

Aggregates like this, though, are dodgy to interpret and are affected by differences in age cohort size and other factors.

For example, the rising numbers of younger women in the workforce with degrees will almost certainly boost employment rates in the next few years, as will immigration flows and the increase in the state pension age. It will then be difficult to discern exactly what part Mr Osborne’s efforts will play in any rise in employment.

No doubt his heart’s in the right place. But what’s he doing? He rightly points out that the public sector cannot really create jobs and that the private sector has to do the dirty work. Yet it can only do so if businesses find it profitable to take on extra workers, or extend hours for those they currently employ.

They can’t do this if employment regulation continues to increase, as it has under the coalition, with increases in parental and other leave, rights to flexible working, pension auto-enrolment, restrictions on employing foreign workers and agency staff, and threatened limitations on zero-hours contracts.

Another area where George Osborne is decidedly flaky is the National Minimum Wage (NMW). Although the government has accepted the Low Pay Commission’s recent recommendation, he is on record as wanting a more substantial increase. Other conservatives, notably Boris Johnson, are flirting with the Living Wage, an hourly rate dramatically higher than the NMW. As Ryan Bourne and I argue in our new IEA publication, The Minimum Wage: Silver Bullet or Poisoned Chalice?, such ideas are ill-advised.

Minimum wages are poorly targeted to deal with poverty, with many beneficiaries in non-poor households while the real problem – as Mr Osborne realises – is those with no jobs.

We suggest regionalisation of the NMW, as its ‘bite’ varies so considerably around the country. While the NMW is less than 40 per cent of median hourly earnings in London, it is 60 per cent in Wales. To maximise private sector employment then, minimum wages could be set by region to reflect productivity and firms’ ability to pay.

We are also recommending abolition of the minimum for under-18s. With very high levels of youth unemployment, young people without skills need to be priced into work. We should of course be working to improve those skills – our performance in schools and colleges is still far from adequate, as the British Chambers of Commerce pointed out again yesterday – but Mr Osborne won’t improve matters by listening to the ‘economics deniers’ who insist that wage levels have no effect on employment.

This article originally appeared on the Spectator’s Coffee House blog.

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.

1 thought on “The minimum wage is broken”

  1. Posted 10/04/2014 at 15:31 | Permalink

    The author states as fact that under the coalition ’employment regulation continues to increase’, citing: ‘increases in parental and other leave’ (have yet to take effect); ‘rights to flexible working’ (actually an extension of the existing right to request flexible working, made more palatable for employers, and which has yet to take effect); restrictions on employing foreign workers and agency staff (not clear what ‘restrictions’ are being referred to here – can we have details?); and, bizarrely, ‘threatened limitations on zero-hours contracts’ (actually a government review of the use of zero-hours contracts, with no current prospect of any restrictions being imposed).

    No mention is made of all the deregulatory measures contained within the Employment Law Review, though (e.g. increase in qualifying period for unfair dismissal, introduction of employment tribunal fees, abolition of the Agricultural Wages Board etc).

    An argument that the minimum wage is ‘broken’ might have more force if the rest of the material wasn’t so one-sided and lazily written.

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