Labour Market

The dangers in politicians seeking popularity through pushing wages up

It’s difficult to focus on anything while Brexit continues to take up so much bandwidth, but I noticed that Philip Hammond has just commissioned a review of the evidence on the impact of minimum wages.

You might well ask quite why we need yet another such review. As someone who teaches labour economics, I am only too painfully aware that the academic journals are packed to overflowing with articles reviewing and re-reviewing the evidence of hundreds of separate studies. The Low Pay Commission, too, has frequently commissioned good-quality work on the topic.

It appears, incidentally, that – as with George Osborne’s introduction of the National Living Wage, which was scandalously announced without consultation with the LPC – Mr Hammond is bypassing the existing set-up. He is outsourcing to an American academic, Professor Arindrajit Dube.
US labour economists are split on the issue of minimum wages. The traditional view – that wage hikes which are not linked to productivity increases ultimately damage employment prospects- has many supporters, prominent amongst them being David Neumark and William Wascher. But a growing number of economists have argued, following on from the earlier work of David Card and Alan Krueger, that minimum wages can be increased with impunity and they should be pushed up to provide a decent living for everybody. After all, as the New York Times put it, ‘a living wage is an antidepressant. It is a sleep aid. A diet. A stress reliever. It is a contraceptive, preventing teenage pregnancy. It prevents premature death. It shields children from neglect.’

Arin Dube is a good econometrician and has a nuanced view of how labour markets operate. But his view of minimum wages, as Mr Hammond and his advisors must know, is closer to Card and Krueger than to Neumark and Wascher. So this review is primed to lead to pushing minimum wages significantly higher, as the Chancellor follows the Conservative Party’s policy of copycatting the Labour Party. If they want an industrial strategy, we must have one. If they want controls on executive pay, so do we. If they want higher minimum wages, we’ll have some of that.

My own view is that , although young unskilled workers do find it more difficult than in the past to get jobs, minimum wages at the levels we have seen so far in the UK probably have had little direct impact on overall employment, But this is because the Low Pay Commission has taken a deliberately cautious attitude in recommending increases to the government. There are real dangers in politicians abandoning such caution and seeking popularity by pushing wages up sharply. As the Institute for Fiscal Studies has argued, there is a real danger than many low-skilled jobs will be automated quite quickly if the National Living Wage continues to rise. There is also some evidence that rising minimum wages have led employers to worsen other aspects of the job, such as staff discounts and overtime pay, and may be a factor in the growth of zero-hours contracts.

Whatever their differences over the employment impact of minimum wages, most economists accept that minimum wages can do relatively little to alleviate poverty. For a start, a clear majority of those on minimum wages are working part-time, while those not working at all are much more likely to be in poverty.

We are already at a position where over a fifth of private sector workers have their pay set by the government, and any further increases will increase this fraction. In some parts of the UK, the proportion is much higher. In the North-East, the North-West and Northern Ireland, for example, the National Living Wage is over 65% of median hourly earnings (as against only 45% in London) and has a major impact on regional labour markets. It cannot be a healthy position to have wages for a large part of the workforce being set by politicians.

There are inevitably significant compliance problems as our complicated system. Impacts on more and more employees. We have five separate minima (more than any other country) and various complex regulations on exceptions and unusual types of payment systems and job requirements. The system is difficult to understand, especially for smaller businesses, and leads to big problems and expense for those who fail to understand the ever-changing rules. I have argued for a simplification of the system and a reduction of its coverage.

Professor Dube seems to be looking primarily at international evidence. He needs instead to address issues and concerns in the UK, rather than simply providing intellectual cover for the Conservative Party’s populist policies. Let’s hope he does so.

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.

2 thoughts on “The dangers in politicians seeking popularity through pushing wages up”

  1. Posted 19/03/2019 at 22:03 | Permalink

    Sadly Alan Krueger died this weekend. He was 56 .

  2. Posted 20/03/2019 at 17:31 | Permalink

    Between those having a job and wanting all type of better conditions, and those just wanting a job, there is a de facto though quite undeclared class war.
    As for me I hate the bar to be set higher with a minimum wage. I much prefer an unconditional universal basic income, even if quite small, to help everyone get out of bed and reach up to the real economy, and not that large to allow someone stay in bed.

Leave a Reply

Your email address will not be published. Required fields are marked *