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).