Labour Market

Employment growth among the low-paid is already slow. Minimum wage hikes will make things worse


Perhaps we – and I include myself – have cried wolf too often in relation to increases in minimum wages. Since George Osborne’s invention of the National Living Wage in 2015, the earnings of the lowest-paid have risen sharply, and yet the most recent figures showed a continued rise in overall employment and no sign of rising joblessness.

However, the Coronavirus crisis alters everything, and is likely to threaten jobs on a scale that we haven’t seen for many years.

So it is concerning that Mr Sunak’s budget not only confirmed a large planned rise  in the NLW from April 1st, but also announced a new remit to the Low Pay Commission (LPC), requiring it to raise the rate from £8.21 today to reach 66% of national median hourly earnings by 2024. Our new Chancellor has seemingly bought into Jeremy Corbyn’s view that pay can be permanently pushed up by central diktat without damaging consequences.

It was already known that the National Living Wage would rise by 6.2%, and other minimum wage rates by varying amounts. Note a couple of things: total employer costs rise by more than this amount for employees enrolled in pension schemes (for a full-time NLW employee this would be 3% of the extra earnings) and there are extra employer NICs (13.8% of the pay increase for a full-timer). Together these mean that total employer cost rises by marginally over 7.2% rather than the headline increase to employees. Some employees may, incidentally, get a smaller increase in net pay if in-work benefits are reduced, thus increasing the size of the notorious ‘wedge’ between employee gains and employer costs.

It is the effect on smaller businesses which concerns me. Evidence from the last annual report of the LPC suggests that smaller outfits (examples cited include hairdressers and convenience retailers) are particularly hit by these big pay hikes. Facing considerable competition, it is difficult for them to push up prices, so adjustment comes from reductions in profits (already low in these sectors), work intensification and cutting back on investment. These expedients can only go so far before businesses collapse.

Despite the generally buoyant labour market prior to the Coronavirus outbreak, sectors with a high proportion of workers on the NLW have grown employment very slowly, if at all, as the Low Pay Commission notes.

I worry that big increases in minimum wages will raise employer costs disproportionately in those poorer regions of the country the Prime Minister wants to help. The proportion of workers on minimum wages is far higher in some parts of the country than others: it is 12.8% in the North East, 12.1% in Yorkshire and Humber, 12.1% in Wales; it is only 5.3% in London. While a pay increase will be generally welcomed by its recipients, it may carry higher risk of job loss in some areas than others. Economists, including those at the LPC, focus on the ‘bite’ of the NLW – its relation to median earnings – as a factor in the risk of pricing the low-paid out of jobs. The bite varies considerably from area to area, as the Table shows (these figures differ slightly from those used by the LPC, but the pattern remains the same). The projected trajectory to 2024 will mean that in some parts of the country it will approach 75%. By this time, too, the NLW is scheduled to apply to those 21 and over, not just to the 25+ age group as at present.

 

National Living Wage as % of median hourly pay excluding overtime, April 2019

UK                                           0.62

North East                               0.68

North West                             0.66

Yorkshire and Humber           0.68

East Midlands                         0.68

West Midlands                       0.66

East                                         0.63

London                                   0.46

South East                               0.59

South West                             0.66

Wales                                      0.65

Scotland                                  0.62

Northern Ireland                    0.70

 

The Chancellor has further boxed himself in on this issue by quoting a projected hourly rate of £10.50 for 2024, based on what the OBR thinks median hourly earnings will be in four years’ time. However, the OBR’s figures are based on pre-Coronavirus modelling. If median hourly earnings do not rise as projected – they could arguably fall – the government either has to slow the growth of the NLW so it doesn’t reach the projected £10.50, or stick to the politically-determined time path and increase the ‘bite’ still further.

It’s a pity George Osborne ever moved us from the position that minimum wages were set by the Low Pay Commission – in effect a small panel of economists, industry representatives and trade unionists – with a mandate to set wage levels which would not endanger jobs. It’s difficult to see any point in the continued existence of the LPC, given its role is now simply to implement arbitrary government targets for the National Living Wage.

And it would be ironic if higher unemployment resulting from such pre-programmed wage hikes were to offset the new Budget measures intended to boost investment and jobs in poorer regions. Let’s just hope I’m crying wolf again.

 

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 “Employment growth among the low-paid is already slow. Minimum wage hikes will make things worse”

  1. Posted 16/03/2020 at 06:22 | Permalink

    “Since George Osborne’s invention of the National Living Wage in 2015, the earnings of the lowest-paid have risen sharply, and yet the most recent figures showed a continued rise in overall employment and no sign of rising joblessness”.

    Could an article on the reasons for this be published some time? Its interesting to say the least and seems to fly in the face of free market thinking about the deleterious consequences of policy driven increases in wage / salary rates as opposed market changes.

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