The IEA releases new research about the minimum wage
A new report, The Minimum Wage: silver bullet or poisoned chalice?, uncovers the adverse effects resulting from continued real increases in the NMW. These include a rise in both zero-hours contracts and unpaid internships, choosier employers and increased black market employment. Plans to push for a Living Wage, as advocated yesterday by the TUC, would exacerbate these problems, pricing more young people out of an already difficult jobs market.
To reduce unemployment and alleviate poverty, the report calls for serious reform of the tax credit system. Not only are tax credits better equipped to target the poorest UK households, they would act as a wage supplement rather than a wage substitute if reformed appropriately. The government must also look to help young people. Suspending the NMW for those under 24 and out of work for more than a year would encourage skills acquisition and long-term employment.
- The NMW has increased significantly relative to earnings. Since its introduction in 1999, the minimum wage has increased by 75%, whilst average earnings have risen by 61% and the Retail Price Index by 53%. Even since 2008 it has risen relative to earnings (14% vs 10%).
- The current national framework is too blunt an instrument. The current system is likely to have substantial effects on private sector employment prospects in the regions. For example, in Wales, the NMW is 70% of median hourly earnings in the private sector, compared to just 42% in London.
- An increasing NMW has led to changing and often undesirable employment patterns. These include: Employers becoming choosier in recruitment, preferring more experienced workers to younger and less skilled workers; increases in both unpaid internships and zero-hour contracts; fewer students in work; and fewer training opportunities for young people as rising wages prevent firms covering the costs.
- The NMW is not a targeted poverty reduction tool. It does nothing to help nearly half of the UK households in poverty that are workless. Many of the NMW’s beneficiaries are young people living with better-off parents, students, or part-time employees who live with a spouse in full-time employment.
- The concept of a Living Wage is a straw man. Well over half of those earning below the Living Wage work part-time and many of these are young people with alternative forms of financial support. It has been estimated that 300,000 fewer young low skilled workers would be employed if the Living Wage was rolled out on a statutory basis. At a time when youth unemployment is still remarkably high, this would be a high price indeed.
- Regionalisation of the NMW from next year, taking into account regional differences in productivity.
- Abolition of the NMW for apprentices and under 18-year-olds to allow young people to gain important in-work experience.
- Suspension of the NMW for all those under the age of 24 who have been unemployed for more than one year, for the first year of employment. This would make young people more attractive to employers, who currently often favour older, more-skilled workers.
- A commitment from the government to not expand the remit of the Low Pay Commission. Its focus must be on providing acceptable wage floors without jeopardising private sector employment.
Commenting on the report, Mark Littlewood, Director General at the Institute of Economic Affairs, said:
“For too long the government has been preoccupied with the idea of guaranteeing a ‘living wage’ without looking at the facts. Youth unemployment is still precariously high and the best way to combat this is to make young, unskilled workers more attractive to employers. An ever increasing minimum wage creates a wealth of unintended consequences and the result is that among the group of people the measure aims to help, very few actually feel any benefit at all.”
Notes to Editors:
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The full report, The Minimum Wage: silver bullet or poisoned chalice?, by Ryan Bourne and J. R. Shackleton can be downloaded here.
As with all IEA publications, the views expressed are those of the authors and not those of the Institute (which has no corporate view), its managing trustees, Academic Advisory Council or senior staff.
The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems.
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