UK: WOULD A MINIMUM WAGE DO MORE GOOD THAN HARM?

UK: WOULD A MINIMUM WAGE DO MORE GOOD THAN HARM? - One thing is virtually certain: Tony Blair's new business-friendly Labour Party, when and if it comes to power, will seek to introduce a national minimum wage (NMW). Labour claims that a minimum wage is

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Last Updated: 31 Aug 2010

One thing is virtually certain: Tony Blair's new business-friendly Labour Party, when and if it comes to power, will seek to introduce a national minimum wage (NMW). Labour claims that a minimum wage is required as a matter of social justice, to reduce poverty. The business community, by and large, remains to be convinced that it will have any discernible impact in this area, since the poor are often not members of the workforce. And many businessmen strongly suspect that, by increasing labour costs, an NMW will adversely affect both employment and competitiveness.

`An NMW weakens the link between performance and pay by granting large increases unjustified by productivity. It would certainly lead to powerful inflationary pressures,' comments the Confederation of British Industry. `The price of labour should be no more regulated than the price of other factors of production. The concept of a minimum wage has no validity in a market economy,' insists the Institute of Directors. It's evident that a high proportion of senior managers implicitly accept the neo-classical economic arguments, and a lot of them find the subject unworthy of discussion.

Economists are themselves deeply divided on this issue, as on so many things. But given the prospect of a general election - and a possible Labour victory - the focus will shift rapidly from argument about the principle of an NMW to the actual assumptions and arithmetic. According to Paul Gregg at the National Institute of Economic and Social Research: `The action will be on setting a rate.'

Labour's economic policy committee has yet to decide on the details, although Blair has reiterated that care must be taken to avoid any adverse impact on the job market. Last September the Trades Union Congress voted for an initial target of half male median earnings, rising later to two-thirds of average earnings. Under this formula and under present conditions, according to researchers at the Transport and General Workers Union, the NMW would be set at £4.15 an hour from day one. However the TUC's spokesman is careful to add that such details as the basic working week, and the treatment of holidays and overtime earnings, would be wide open for discussion.

The CBI calculates that an NMW of around £4.05 an hour would add £3.5 billion to employers' direct wage costs; also that - with minimal allowance for restoration of differentials - about 150,000 jobs could be lost, which would hurt female workers, in particular, and possibly the young as well. Economist Gregg agrees that much over £4 would be unacceptable, mainly because it would `drag in vastly too many people'. But he is firmly pro-NMW because of its effect on poverty. The benefits system requires urgent overhaul to encourage more people back to work, he argues, `but we need a minimum wage on the other side'.

In France and Holland - where it exceeds 50% of average earnings - the NMW has almost certainly had a damaging effect on jobs. But other international comparisons tell a different story, claims Gregg. In the US, where the minimum is below 50% of the average, it's possible to examine the consequence of uprating in particular sectors in different states: `The effects are very small one way or the other - basically they're zero'. Gregg thinks that a British NMW could fairly be pitched at the £3.70-£3.80 level. But rather than `inventing rates' for the UK, he suggests another approach: examine the pay distribution in traditionally low-paid sectors, such as retailing or textiles, with a view to pulling up the earnings of, say, the lowest paid 5% - not 15% or 20%. `That would seem to be a sensible starting point.'

It's not quite so appealing when seen from the perspective of Edmund Gartside, chairman of Shiloh, textile spinners of Oldham. Gartside is opposed to an NMW in principle, but also for the knock-on effect it would be likely to have on differentials and other costs: `When we used to negotiate centrally we always had a problem with overtime'. Besides, he adds, `We often take on people who just want some light work'.

But despite the Thatcher revolution, the free market is still distorted at almost every turn, and rightly so. Christopher Haskins, chairman of Northern Foods, was a member of John Smith's committee on social justice and is therefore one of the comparatively few businessmen happy to embrace a minimum wage in principle. `You wouldn't be opposed to not sending boys up chimneys,' he says. And you can see what he means.

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