Fifteen years after its introduction, Britain’s minimum wage is a conservative version of a radical policy. The Labour party, scarred by successful Conservative opposition to its minimum wage proposal at the 1992 election, spent five years building support for a pay floor. After the 1997 election, the Labour government established the Low Pay Commission, the public body which recommends minimum wage rates.
Its mandate is cautious; the LPC must recommend “a minimum wage that helps as many low-paid workers as possible without any significant adverse impact on employment or the economy”. But this may change. Conservatives may support a large increase in the minimum wage, suggests Rachel Sylvester in The Times.
This is because an increase in the NMW is seen as solving three related problems.
The first is political. The Conservative leadership regrets the party’s decision to oppose the minimum wage. The party’s “brand” remains toxic among, for example, low and median-wage workers in northern England – an electoral weakness noted by pressure groups such as Renewal and Bright Blue. MPs such as Matthew Hancock and Robert Halfon, and London mayor Boris Johnson, speak favourably of the living wage campaign. Policies that confound voters’ expectations of a party are more likely to be noticed than those affirming assumptions. Conservative support for a large increase in the minimum wage could therefore surprise, and prove politically popular.
The second is economic, and is to do with the extent and persistence of low pay in Britain. About 7m people earn an hourly wage that is lower than the “living wage” (IFS), an amount based on surveys of “the basic cost of living” and equates to £8.80 in London and £7.65 for the rest of the UK. The structure of the lower end of the UK’s labour market means that this number is unlikely to fall any time soon; Britain has a higher share of its workers classed as “low paid” than most comparable countries.
Without going into the extensive evidence, the academic consensus is that the minimum wage has been a success according to the terms of reference set for the LPC. Employment has, on the whole, not been adversely affected.
Upon introduction, the minimum wage reduced the most egregious official cases of low pay. For much of the last decade it also rose faster than the equivalent growth in median weekly earnings, as shown by this chart from the Resolution Foundation. (In typically transparent fashion, the LPC said in its 2003 report that it would recommend this increase above average weekly earnings.)
Nevertheless, it has not – and was not asked to – “solve” the problem of low pay above the minimum wage. The name “Low Pay Commission” is a misnomer; it should have been called the Mimimum Wage Commission (H/T James Plunkett.) Low pay is increasingly clustered round the minimum wage, as the RF chart of the distribution of pay by 10p hourly intervals at the lower end of the UK labour market shows.
“The new frontline in the battle against low pay is the one fifth of the UK workforce who earn above the NMW but still too little to afford a basic standard of living”, according to the think tank. The Conservative party is not alone in looking at whether the minimum wage can now be updated for a new era.
Under the LPC’s terms of reference, the minimum wage will not rise quickly enough. Last year’s rise in the adult minimum wage represented the largest ever real terms fall in its value. And based on the OBR’s forecasts of median wages, the Resolution Foundation argues that the LPC is unlikely to recommend any dramatic rises (see charts below).
The third reason concerns the public finances. On Monday, George Osborne announced that he would cut the “welfare” budget by a further £12bn by 2017/18.
As long as benefits for current pensioners are protected, it will prove difficult to reach this total without cutting in-work benefits and tax credits. The government spends more on benefits and tax credits for families where at least one person is in work than it spends on unemployed families. One way that it could spend less is if employers paid higher wages; Ferdinand Mount, head of the No 10 policy unit under Margaret Thatcher, suggests that companies “should be encouraged to take up the slack”.
Now, given that this idea has crossed other minds, there are estimates of how much extra revenue the Treasury could raise through an increase in the minimum wage. A joint IPPR-Resolution Foundation analysis finds that the Treasury could make a gross saving of £3.6bn if all employees were paid at least the living wage (see chart below). If you subtract the costs of implementing this in the public sector, it would save £2.2bn.
An earlier Institute for Fiscal Studies paper finds even bigger savings – and higher costs for companies. If every private sector employee paid below the relevant living wage was to receive an increase up to that level, it would increase gross earnings by about £12bn and net the Treasury about £6bn; i.e., costing employers £2 for every pound saved by the Exchequer (H/T Chris Giles).
The astute observer will have noticed that a policy promising to detoxify the Conservative brand, improve living standards, and reduce the benefits bill, is likely to have some problems, regardless of what form the rise takes. The biggest employers of low wage labour are hardly clamouring to support a living wage. A higher minimum wage is not a direct substitute for tax credits and in-work benefits. But there is a growing consensus that the minimum wage could and should be increased – and the Conservatives seem to preparing a grab for this traditional Labour territory.
I’ll try to look at the options for a new minimum wage in another post.