‘If you earn £6 an hour flipping burgers then Allegra might have good news for you,’ said Jeremy Paxman on Newsnight yesterday. Paxman was of course introducing the mooted Conservative Party policy idea to increase the minimum wage, a story reported by Allegra Stratton. Stratton responded: ‘We’ve learnt that the Prime Minister’s advisors are thinking of turning Tory policy on its head and raising the minimum wage - not yet, but some time before the next election.’
For me, this brief exchange and the rest of the Newsnight piece reflected the state of the debate on this issue in the UK. First, Jeremy Paxman assumed that those flipping burgers would be able to keep their jobs if the national minimum wage was increased ‘significantly’. Second, the added barrier that a higher minimum wage would create for those young people or those with low skills from finding employment was not mentioned once – Stratton briefly touched on Treasury concerns about it causing unemployment, but there was no discussion of how it might affect new net job creation. Third, Stratton interviewed nobody who thought raising the minimum wage now was a bad idea. For balance, from the right we had David Skelton, in favour of the minimum wage increase ‘to broaden the Conservatives' appeal’. And he was accompanied by James Plunkett of the Resolution Foundation, who thought that the minimum wage needed to increase because employers were taking advantage. So nobody who thought it might be a bad policy, despite the Low Pay Commission’s report this year being nuanced about the cost and benefits of raising the minimum wage and employers saying that it would be a bad idea in the economic climate.
Now I’ve written about why I think raising the minimum wage would be a bad idea here before, as well as posing some questions about it (which to my mind, nobody has yet answered). There’s no point just rehearsing these arguments over and over again. But now we seem to be drifting towards a political consensus that raising it significantly would be a good thing. At this stage, the economics (which is divided on this issue, it must be said, particularly in the US where the most recent academic work – as opposed to self-reinforcing literature reviews – have suggested that minimum wage increases negatively affect new job creation) almost doesn’t matter anymore. Politicians are often taken in by ‘popular policy’ as opposed to policy, the eventual results of which will be popular’.
So why should Conservatives not support this idea?
First, because even if the effect is small it will lower employment or reduce new net job creation from what it otherwise would have been. A recent NIESR report on the roll out of the so-called ‘living wage’, for example, found that the employment cost of its would be 160,000 jobs. That’s reducing opportunity. Early advocates of the minimum wage knew this. Indeed, a recent Journal of Economic Perspectives report shows how both the Progressives of the ‘Progressive era’ AND their neoclassical critics all believed the minimum wage would lead to higher unemployment than there would otherwise be – the difference was that the progressives (wrapped up in their pro-eugenics mindset of the time) thought this was a good thing. Sidney Webb, for example, that hero of the Fabian Society and eugenicist, said: ‘Of all ways of dealing with these unfortunate parasites, the most ruinous to the community is to allow them to unrestrainedly compete as wage earners.’ Conservatives should not believe in writing people off for some notion of the common good – they should believe in protecting and looking out for individuals, and protecting their freedom to get on the work ladder. They should back the outsiders, not the insiders, even if there are many more of the latter.
Second, because the people most likely to lose out are the young and those with no qualifications, i.e. the people that need the most help. Increasing the minimum wage on firms actually employing these people is thus akin to putting a tax on firms who are actually employing the sorts of people who otherwise wouldn’t be employed. This is madness – which the party appears to recognise, because it proposing to compensate the firms in some way. But this is akin to imposing a sales tax on the firm and then reducing another tax elsewhere. Others instead want the firm to pick up the full burden of higher pay, and even state that this will ‘help the public finances’. This is just a straight incomes policy to help government, when the same result could be achieved in terms of disposable income for workers by cutting government tax on workers’ wages. There’s nothing conservative about it.
Third, because having a national minimum wage inevitably leads to labour market distortions. The Government actually wanted to abolish national pay bargaining at one stage because they recognised, as Alison Wolf has detailed, that it had big distortionary effects, particularly in the regions. The same concepts apply to a national minimum wage, particularly when levels of youth unemployment and unemployment so widely differ between regions. Pete Hoskin reminds us that ‘back in 2007, even Gordon Brown was eager to regionalise the minimum wage’. So why would Conservatives, of all people, be interested in a top-down, men-in-London-know-best approach to all businesses employing low paid workers across all regions of the country?
I don’t doubt many people would gain from increasing the minimum wage, and that it might even be electorally popular for the Conservatives. I just think that, given its side effects and those it would leave behind, it’s not something that Conservatives should support.
Ryan Bourne is Head of Economic Research at the Centre for Policy Studies.