Minimum wage pledges will benefit the wrong people

Low-pay sectors such as hospitality will be "heavily affected" by both parties' plans.
Photo: Michael J P / Shutterstock

Increases in the national minimum wage pledged in the general election could be a “gamble” and will inadvertently benefit middle- and higher-income households, according to economists.

A briefing note by the Institute of Fiscal Studies looked at Conservatives’ plans to raise the national living wage (NLW) to two-thirds of median earnings by 2024 and Labour’s proposals for a £10 minimum wage for everyone aged 16 and over from next year.

Under Conservative plans, the NLW would increase to an estimated £10.39. This is around 7% higher than expected under current policy (60% of median earnings) for those aged 25 and over and 16% higher for 21- to 24-year-olds.

Labour’s £10-for-all proposition represents a 17% increase on current plans for those aged 25 and over, a 26% increase for 21- to 24-year-olds, a 58% increase for 18- to 20-year-olds and, for 16- and 17-year-olds, a mammoth 123% hike.

“The dramatic rises in the minimum wage proposed by the Conservatives and Labour would take us into uncharted waters,” write the authors. “No other country has attempted such a large rise from such a high base, so past evidence is of limited use in predicting future impacts.”

Increases in minimum wages must at some point reduce employment, as employers can no long afford to hire, but the researchers say the evidence base does not suggest how close we are to that point.

The report highlights a number of other reforms in recent years have pushed up employer costs, including the introduction of the apprenticeship levy in 2017 and the rise in employers’ minimum pension contributions from 2018.

“The Conservative party also has plans to lower the age limit to which auto-enrolment applies (from 22 to 18) and to extend the range of earnings used to calculate minimum contributions. These reforms may make it more challenging for companies to absorb further increases in the minimum wage,” say the authors.

The evidence on any negative employment effects would take time to come in and yet the minimum would have been raised to £10 in one fell swoop. This is a gamble” – IFS authors

The Conservatives’ plans would see the share of 21- to 24-year-old employees directly affected by the minimum wage rise from 9% today to 36% by 2024. Under Labour policy, 49% of 21- to 24-year-old employees, 82% of employed 18- to 20-year-old employees and 94% of 16- and 17-year-old employees would be directly affected by the minimum wage.

The authors Jonathan Cribb, Robert Joyce and Xiaowei Xu write: “The direct benefits from minimum-wage increases would mostly go to middle- and higher-income households. Only 22% of minimum-wage workers today live in the lowest-income fifth of working households, and only 19% live in a household that is in relative poverty.

“Many of those who live in low-income households will see part of their gains from higher wages clawed back through reduced entitlements to means-tested benefits such as universal credit.”

Until 2015, the national minimum wage was set based on a recommendation from the independent Low Pay Commission, which identified the highest wage rate possible that would not damage employment levels.

“Higher wages will garner immediate praise, while the risks may take longer to materialise, and they may materialise (or be shown to have materialised) over a time span longer than the electoral cycle,” say the report.

“Labour’s plans in particular would leave no time to respond if it turns out that the appropriate minimum wage is somewhere between its current level and £10 per hour, since the evidence on any negative employment effects would take time to come in and yet the minimum would have been raised to £10 in one fell swoop. This is a gamble.”

The IFS describes George Osborne’s rebranding in 2015 of the minimum wage to a ‘living wage’ as dangerous. “The concept of a living wage fundamentally divorces the setting of the minimum wage from the trade-off between pay and employment. The wage level required to guarantee workers a decent standard of living may be one that leads to huge job losses,” say the authors.

The economic analysis also warns that, faced with higher wage costs, employers may circumvent the minimum wage rates by contracting work out, relabelling employees as freelance contractors for whom the regulations do not apply.

“Judging the speed at which the minimum wage should rise is art (and politics) as well as science,” but the report says the government should recognise three facts:

  • evidence on the impact of a rise in the minimum wage does not arrive instantly
  • it would be difficult to lower the minimum wage instantaneously were politicians to ‘overshoot’, and
  • the consequences of overshooting are not necessarily easy to reverse. Once companies invest in labour-replacing capital, for example, or young people lose out on formative work experience, it may not be possible to undo the damage.

2 Responses to Minimum wage pledges will benefit the wrong people

  1. Avatar
    Julie 18 Nov 2019 at 7:43 am #

    Clearly not written by one who lives in relative poverty. To suggest job losses and decrease in universal credit is an attempt to safeguard their own capitalism.

    A) Many would be happy to be able to afford to live on their wages and not have to top it up with universal credit (why should we bridge the gap for Director’s and Politicians luxury lifestyles whilst they pay support staff pennies?!)

    B) Job losses would imply jobs are currently in situ out of ‘kindness’ and not because the support staff are needed. If a company relies on support from others it needs to pay them a fair share so that they are not profiting from other’s blood.

    C) Living wage is still no where near in-line with inflation or the cost of living. Every top 10% earner should understand what it is like to live in the bottom 10%, we need experienced and qualified people making these decisions, not privileged capitalists.

    How cruel we are to our fellow human beings. I’m ashamed of this Country.

    • Avatar
      H 10 Dec 2019 at 12:47 pm #

      It would all depend, as this article suggests, how close we are to a “breaking point”. It is imperative that the quantity of labour demanded and supplied remains in equilibrium to avoid any implication of job losses. However, a slow down in the economy, which we are experiencing currently, would likely decrease the demand of labour. If this happens, coupled with an an increase of the minimum wage WOULD decrease the amount in employment (assuming the number of workers, labour supply, remains constant). Either the demand for labour would decrease, or the supply curve would shift left.
      IF we already are in equilibrium, then a drastic increase in the minimum wage would result in job losses, and the majority of people who would be affected would be on lower incomes.

      A drastic increase would increase wage inequality in the long run and would also decrease the demand in labour, especially foreign. If it is maintained over a long period of time, the economy may collapse… then we really would have no jobs or money.

      Don’t be ‘ashamed’ of this country if careful measures have to be implemented to make sure we all survive in the long term. It has to be a gradual process that reflects the growth of the economy, not inflation.

Leave a Reply