The UK: a place where everyone has an opinion about what everyone else should be paid
5 April 2016
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Monetary Policy
Government and Institutions
Economic Theory
11 November 2024
“How much do you earn then?” You get asked this a lot when you do media work discussing pay. Last week the topic was the introduction of George Osborne’s National Living Wage – a 7.5 per cent increase in the minimum wage for over-25s from 1 April with significant hikes to 60 per cent of median earnings by 2020.
Many sceptics such as me believe it will have a range of unforeseen consequences, damaging opportunities for many low-skilled workers. Yet the unspoken assumption laced into the question of “what do you earn?” is that anyone earning more than the new Living Wage is somehow unentitled to question whether it is economically sensible. A sort of “check your privilege”.
This will be news to Osborne. As a result of his decision to overthrow the old framework, and overturn the careful diligence of the Low Pay Commission in setting the minimum wage to avoid job losses, it is estimated that by 2020 the chancellor will set the hourly rate for 18 per cent of the private sector workforce.
Conservatives, at least rhetorically, say they think markets work pretty well. But not, apparently, the labour market. Rather than allowing employers and employees to come to pay decisions themselves as far as possible, taking into account supply and demand factors and firms’ ability to pay, the Conservatives instead want to arbitrarily peg the wages of many low-skilled workers to 60 per cent of median earnings.
It is not clear at all why this should be the case. The old minimum wage framework at least had some economic rationale. Though it was debatable, the argument broadly went that many firms had a high degree of market power over their employees, and so a low minimum wage could help eliminate so-called exploitative low pay without costing jobs. What the chancellor seeks to achieve now is anyone’s guess. All that he has shown is that he’s willing to sacrifice some jobs (estimated to be 60,000 by 2020) for more wage equality in the bottom half of the distribution.
Sadly, a desire for more equality is not the only justification for compelling or telling firms what to pay their staff. In fact, we live in an age where everyone seems to have an opinion on how much other people should be paid, with the fuzzy concept of fairness apparently a much better guide for directing economic activity than millions of interactions between employees and employers.
There are those in the official Living Wage campaign, for example, who seem to believe that the role of an employer is not to pay staff for the work they do, taking into consideration their talents, the conditions of the industry and the worker’s productivity. No, apparently the employer should pay people to compensate them for their rents, fuel and childcare bills – all areas over which the employer has no control and where governments often inflate costs as a matter of policy.
For others, what one person deserves to be paid is inextricably linked with the notional industry they work in and their “success”. Five female US soccer stars have accused the US soccer federation of pay discrimination, for example, claiming that they have been more successful than the men’s team. This completely ignores, of course, the size of the market and ability to generate revenue from the men’s game.
The most egregious example of “fairness” trumping reality comes in the continual citation of crude aggregate gender pay gap figures, showing that women on average earn less than men. The shunning of more detailed analysis implies that many believe everyone should be paid the same regardless of the jobs people are doing, their experience, time spent in the labour market or their age.
In reality, pay is determined by a messy range of factors which affect the supply of workers and how they are demanded by firms. But as the above examples show, what wages people can command frequently gets confused with the subjective concept of what they “deserve”. Moving away from allowing markets to set wages, and towards the idea that people should be paid what they deserve, requires someone ultimately to decide on the rate and a great deal of coercion to implement it. And as the estimated 60,000 fewer people in work as a result of the living wage shows, often with a high cost too.
Ryan Bourne is the IEA’s Head of Public Policy, and Director of the Paragon Initiative. This article was first published in City AM.
Many sceptics such as me believe it will have a range of unforeseen consequences, damaging opportunities for many low-skilled workers. Yet the unspoken assumption laced into the question of “what do you earn?” is that anyone earning more than the new Living Wage is somehow unentitled to question whether it is economically sensible. A sort of “check your privilege”.
This will be news to Osborne. As a result of his decision to overthrow the old framework, and overturn the careful diligence of the Low Pay Commission in setting the minimum wage to avoid job losses, it is estimated that by 2020 the chancellor will set the hourly rate for 18 per cent of the private sector workforce.
Conservatives, at least rhetorically, say they think markets work pretty well. But not, apparently, the labour market. Rather than allowing employers and employees to come to pay decisions themselves as far as possible, taking into account supply and demand factors and firms’ ability to pay, the Conservatives instead want to arbitrarily peg the wages of many low-skilled workers to 60 per cent of median earnings.
It is not clear at all why this should be the case. The old minimum wage framework at least had some economic rationale. Though it was debatable, the argument broadly went that many firms had a high degree of market power over their employees, and so a low minimum wage could help eliminate so-called exploitative low pay without costing jobs. What the chancellor seeks to achieve now is anyone’s guess. All that he has shown is that he’s willing to sacrifice some jobs (estimated to be 60,000 by 2020) for more wage equality in the bottom half of the distribution.
Sadly, a desire for more equality is not the only justification for compelling or telling firms what to pay their staff. In fact, we live in an age where everyone seems to have an opinion on how much other people should be paid, with the fuzzy concept of fairness apparently a much better guide for directing economic activity than millions of interactions between employees and employers.
There are those in the official Living Wage campaign, for example, who seem to believe that the role of an employer is not to pay staff for the work they do, taking into consideration their talents, the conditions of the industry and the worker’s productivity. No, apparently the employer should pay people to compensate them for their rents, fuel and childcare bills – all areas over which the employer has no control and where governments often inflate costs as a matter of policy.
For others, what one person deserves to be paid is inextricably linked with the notional industry they work in and their “success”. Five female US soccer stars have accused the US soccer federation of pay discrimination, for example, claiming that they have been more successful than the men’s team. This completely ignores, of course, the size of the market and ability to generate revenue from the men’s game.
The most egregious example of “fairness” trumping reality comes in the continual citation of crude aggregate gender pay gap figures, showing that women on average earn less than men. The shunning of more detailed analysis implies that many believe everyone should be paid the same regardless of the jobs people are doing, their experience, time spent in the labour market or their age.
In reality, pay is determined by a messy range of factors which affect the supply of workers and how they are demanded by firms. But as the above examples show, what wages people can command frequently gets confused with the subjective concept of what they “deserve”. Moving away from allowing markets to set wages, and towards the idea that people should be paid what they deserve, requires someone ultimately to decide on the rate and a great deal of coercion to implement it. And as the estimated 60,000 fewer people in work as a result of the living wage shows, often with a high cost too.
Ryan Bourne is the IEA’s Head of Public Policy, and Director of the Paragon Initiative. This article was first published in City AM.
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Ryan Bourne: “apparently the employer should pay people to compensate them for their rents, fuel and childcare bills”. And their tax bills.
We are hearing a good deal just now about how markets dislike uncertainty (in connection with the forthcoming Brexit referendum). Yet it is worth emphasising that once you let politicians in on the act, you increase uncertainty. We all know that they tend to panic (as in the Scottish Independence Referendum)
they tend to be short-termist and they are very keen on U-turns (the Chancellor of the Exchequer specialises in them). In fact they often seem to go out of their way to create uncertainty. I was more surprised than I should have been by the way the government tried to rubbish the recent recommendation on MPs pay. It was precisely because there is never a ‘convenient’ time to increase MPs’ pay that a supposedly independent body was set up to make recommendations. But the moment that body did so, an interfering government made every effort to sabotage it. They simply can’t resist meddling. I think it was Desmond Donnelly, in his later, more market-oriented years, who used to advocate very long holidays indeed for all British politicians, preferably on faraway foreign islands. He always said that way they would be well worth their salaries!
The 60% of median earnings figure is of course a perpetually moving target and commitment to it could produce many unforeseen problems in the medium term. And It’s a bigger problem even than you suggest. There are now people drawing serious attention to ethnicity pay gaps and demanding a similar policy push as for gender issues. Although less vocal so far, there are also those pointing to other pay gaps , eg disability and religion. You didn’t mention top pay either – the High Pay Centre and others would like to see an upper limit on CEO pay set as a multiple of the lowest-paid worker, and there are already restrictions of various sorts which limit companies’ freedom to fix executive pay. The force of politician-led public opinion now restricts salaries in the public and not-for-profit sectors and this may have undesirable results in time.
The implication of all this is very worrying both for the economy and ultimately for personal freedom and responsibility.
The author has ignored the obvious reason for the increases in the minimum wage. Many employers pay less than they can afford because they know their employees will receive benefits to bring their income up to a level they can live on. They also know that if they increase their employees low wages, those employees will not see much of the increase because they will lose benefits. A mandated minimum wage is not without problems but is it really better for the taxpayer to be subsidising pay directly?