Unemployment and the minimum wage: the government cannot escape responsibility
Today government ministers have been doing the rounds of the TV and radio studios explaining away these figures as an unfortunate by-product of the credit crunch and therefore beyond their control or responsibility. There is some truth in that, but is it really the case that the government bears no responsibility for the increase in unemployment or that there is nothing it can do to improve this situation?
To answer that question, we need to look at the minimum wage. The minimum wage was introduced by the UK government in 1999. Prior to its introduction, the IEA published a special edition of its journal Economic Affairs in which economists examined the evidence for and against a minimum wage. Their overall conclusion was clear: in a period of sustained economic growth, a minimum wage has negligible positive or negative effect; but in a period of recession a minimum wage is likely to deepen that recession by preventing labour markets from clearing. Firms will be unable to take on new employees willing to work for relatively low wages in order to escape unemployment; if firms cannot take on new employees and people cannot exit from unemployment, then the route out of recession becomes much slower and more arduous.
Sadly, rather than reducing or abolishing the minimum wage, in March this year the government announced that next month it will increase to £5.73 per hour. In the present economic climate this is, frankly, lunacy.
The UK unemployment rate is still markedly lower than the continental European norms of around 10%, but there is a real danger that a lasting legacy of the present recession will be increased structural unemployment – that is, unemployment that is long-term and seemingly built into the economy – at continental European levels. The government simply cannot blame this on the global economic climate alone. It is a consequence of the policies introduced when the present Prime Minister was Chancellor of the Exchequer despite the evidence and warnings that the long-term consequence of a minimum wage would be much higher unemployment when the business cycle inevitably entered its downward phase.
The government should abolish the minimum wage immediately. If that is politically impossible, then it should be reduced back to its original rate of £3.60 per hour. It would be interesting to see what sort of positive boost such a decision would give to the economy and the financial markets.