It is very rare that I hear something on the radio in the morning that makes my blood boil. Mainly because it is normally so early that I’m still half asleep and more interested on getting to the train on time than getting aggrieved at an inanimate object. I made an exception this morning to the views being expressed by Mark Littlewood from the Institute of Economic Affairs on the National Minimum Wage.
The argument goes, and I should add that it isn’t only Mr. Littlewood that makes this argument; the minimum wage is stifling job creation. Put simply if it was lowered then people would hire more, there are bosses out there who have work that needs doing but don’t think it is worth £6.08 per hour to get it done. It is, in his mind and many others, a simple economic argument: business will pay the least for labour that it can. He even went on in the interview to connect the level of the minimum wage with the youth unemployment figures.
The argument is infuriating in its simplicity and appeal. It is also completely facile and ill-conceived.
So what is the problem with this?
Before we deal with the moral arguments (which are a matter of opinion) let us have a look at the more practical business arguments. First the argument assumes a homogeneity of skills and ability, that labour is universally transferable therefore the only market determinant is price. And of course this just isn’t true. There isn’t one labour market, there are several interlinking labour markets and massive differentials in skills and abilities. Companies compete with one another for labour and that is why there are wage differentials. John Lewis will pay vastly different wage rates to the likes of Argos for example, but they are both employing retail workers. If businesses only employed at the lowest possible level, then this simply wouldn’t happen, they would all pay at the £6.08 level.
Next let us look at the youth unemployment argument. Unless I am massively mistaken and there has been emergency legislation over night, the 16-17 year old rate and the 18-20 year old rate of the National Minimum wage are lower (at £3.68 and £4.98). So IF businesses have all of these jobs that need doing but don’t think that they are worth £6.08 an hour and IF the labour market is purely financially driven, then surely we should be seeing unemployment in these age groups dropping? Of course a flick through the recent unemployment statistics shows that not to be the case. Tuition fees, education and skills gaps? No. The reason these guys are unemployed is the adult national minimum wage rate being set too high.
I worked in the business services sector before the National Minimum Wage. We employed a lot of people in very labour intensive low skilled roles for a variety of clients from big private sector names to government departments. I can tell you that the hourly rates that were paid by some of these businesses were shocking (less than a pound an hour in some cases). And this is where we come to the root of Littlewood’s argument, because in this labour market there is a homogeneity of skills and transferability of labour and very often there is greater supply than demand. This is where wage rates can be pushed down.
But this is also exactly why the National Minimum Wage was introduced back in 1999, to protect the most vulnerable and to afford everyone the right to a living wage. We’re talking about £6 per hour here – for a forty hour week that would equate to less than £12,500 before tax and National Insurance. Does that sound too much to pay someone to clean your floors, to pick your fruit, to bring you your Caramel Macchiato?
We are living in difficult times, every time we switch on the television, turn on the radio, open a newspaper or flip the cover on our iPad, there are forecasts of doom and gloom. And in these times there are people who will push ideological messages under the cover of economic messages. Littlewood has his views and I have mine, that is the wonderful thing about a democracy. But when you hear people talking about the removal of this right or that right, the reform of this or that and basing it on an economic imperative, take a moment to look under the surface of the argument and examine whether it really is as simple as it seems, or whether there is something else lurking within.
UPDATE: In the UK, you can now listen to the original interview here (the interview starts at 28m 15s in).
change-effect 
Thank you for writing this post, Neil.
I think you are absolutely right here. The national minimum wage is there to create a statutory pay floor. This statutory pay floor is there for a very real purpose, and that purpose is just as essential in “difficult times” as it is in boom times.
It’s to be expected that outcries against the national minimum wage (such as that which inspired you to write this post) will be heard directly after each latest annual uprating.
But I have been very taken aback today by reports that some members of the Low Pay Commission (LPC) are apparently adding their voices to this choir.
Today’s Daily Telegraph (http://www.telegraph.co.uk/finance/jobs/8802890/Minimum-wage-harming-job-opportunities-for-young.html) reports that Low Pay Commission (LPC) chief economist Tim Butcher has suggested that (as the Telegraph puts it) “firms may be reluctant to create jobs by recruiting inexperienced staff because they are put off by the increased wage bill.” It says that this perspective will inform the LPC’s review of the labour market position of young people – one of the tasks in the remit for its 2012 national minimum wage report (http://www.lowpay.gov.uk/lowpay/report/pdf/LPC_Remit_2011-12.pdf).
The LPC remit for 2012 begins with the following words: “The Government supports the National Minimum Wage.”
I can only hope that this support translates into a commitment both to maintaining and enhancing the national minimum wage for all workers that it covers, and that the initial impetus for the introduction of a UK minimum wage back in 1999 is remembered when it comes to deciding the future of the statutory pay floor.
Thanks for the comment Michael and I completely agree. The removal or suspension of the minimum wage would be a step backwards.
I’m sure there are a whole lot of other points which will occur to me on this but for now:
I can’t believe how low the under 18 minimum wage still is.
There are good arguments that minimum wage is not a living wage.
Not totally unrelated: I’m also very concerned about some of the off-shoring practices I’ve noticed recently. There’s hidden, completely legal, sweat-shop conditions and wages going on (and I’m not talking clothes manufacturing here).
Billy Bragg played at the Cable Street remembrance concert last night. This post brought to mind some of his lyrics:
“And I’ll give my consent, to any government, that does not deny a man a living wage”
(I think that’s from Between the Wars)
I worry about how close we are to denying even more people a ‘living wage’.
I worry about the significant rise in costs here too, which of course relates to the definition of “living wage”
Great blog Neil, elouently expressed
PS It speaks volumes I apparently can’t spell ‘eloquently’
Happens to me all the time! I would have corrected it for you if you’d asked.
It’s a very worrying affair when you see that at £12,500 a year, there seems to be a call to pay people even less. I can’t comprehend how someone earning that amount is expected to ‘live’ in today’s society. This is an age where without the means to live, you just survive. And that is a poor reflection on society if we allow that to happen
The article Michael linked to was a surprising read too. With so many woes and hardships being faced by far too many people, it just seems bizarre that recommendations like this are allowed to be influential in any way. Although, freeing up £250 million for some councils to go back to weekly refuse collection seems perfectly laudable.The importance of refuse collection not withstanding, surely helping those who are unemployed is a greater priority?
Unemployment should be our number one priority for the economic recovery. I guess people just have different views on how that can be achieved.
Is £12500 “too much to pay someone to clean your floors, to pick your fruit, to bring you your Caramel Macchiato?” – Well yes actually, certainly thats what the CEO, Directors, Non execs, shareholders and other ‘stakeholders’ (Dont you just love that word?!) would say as it drives down profit.
Actually, we could go further to the hedgefund and pension fund managers who are chasing the best performance. And performance of course, means profit. Or more importantly.the earnings on the shares. Or maybe even further – to you and me. Yes, in this age of individuality we are now more than ever responsible for our own future including our pensions. And guess what? We are beating our financial advisors over the head to get the best return possible for our investment. And so it goes on. The circle comes back round…
And therein lies the problem. Our relentless pursuit of profit on the one hand and the need to do right on the other. Until we break this cycle, nothing will change. Pointing the finger and arguing over symptomatic activity is futile as it comes back to us eventually. We need to resolve the dichotomy first.
The bottom line is that the Mark Littlewoods of this world care little for the riff raff who serve the coffee or clean the floors and spend most of their lives trying their best to isolate themselves from this slice of society.
If we want to stop this downward pressure then we all have to step in. Are we prepared to stop window shopping in John Lewis, getting the expertise from their employees before chasing the best price online via Amazon or wherever the next cheapest deal is? Are we prepared to pay an extra % point on our mortgages so that the banks can earn a little more and filter it down to better terms and conditions for their outsourced cleaning services company?
I doubt it.
Not all CEOs and Directors think that way Gareth, but I take your point.
Times of high employment coincide with high minimum wage, e.g. 50s USA, 1999 onwards in UK. The Laffer curve does not reflect reality. I recall hairdressers telling me in 1999 that the need to pay NMW might put them out of business, but in fact the effect was higher employment in the sector. More heads of hair were cut.
I’d guess most of us continued to have a hair cut when we needed it regardless of whether there was a modest price rise. But some of the millions who got a NMW pay rise spent some of it on hair cuts that had previously been postponed for lack of funds.
Great point, although these days I don’t have much hair to cut…..