UK: Smith on Economics - Minimum wage, low satisfaction.

UK: Smith on Economics - Minimum wage, low satisfaction. - Many employers are opposed to the principle of the minimum wage even though most large companies say it would make little difference to what they currently pay their direct employees. David Smith

Last Updated: 31 Aug 2010

Many employers are opposed to the principle of the minimum wage even though most large companies say it would make little difference to what they currently pay their direct employees. David Smith.

Close your eyes, forget for a moment about the political packaging, and ask yourself the question: what does a Labour government actually mean? Does it mean, as it has done in the past, a shift in the balance of economic power towards workers, and away from owners and managers? If so, then why has Labour received such a handsome endorsement from business, including the recruitment of many of its luminaries to various task forces and, in the case of Lord Simon, to a ministerial post?

Wages at a record low, but ...

Aside from such a close involvement with the new Labour government, there are other ways in which business owners and managers have never had it so good. Despite the recent pronounced fall in unemployment it remains the case, as the chart shows, that wages are at a record low in relation to gross domestic product. But you don't have to look far to find ways in which the process of reversing this is beginning under the new government.

And perhaps the most interesting example is the minimum wage, now moving towards becoming a reality following the appointment of Professor George Bain of the London Business School as head of the Low Pay Commission which will set the level of the minimum wage. The Low Pay Commission will deliberate for up to a year before coming to its decision.

Business attitudes to the minimum wage have been fascinating. No company wants to admit to being a low payer and indeed, the vast majority of larger companies looking through their payrolls will find that even if the unions were successful in getting a minimum wage of about £4.50 an hour, it would have little effect on what they pay their direct employees. And yet many of these same businesses still oppose the principle of the minimum wage.

This is, I suspect, partly because many companies, large and small, indirectly pay wages at or below the minimum demanded by the unions. To the extent that they employ outside cleaning, catering and security contractors, many firms will find their bills for such services rising if it is set at a high level. Bain himself argues that, as long as the level set is not excessive, a floor for wages has the effect of encouraging employers to value their workers more. Thus labour turnover is reduced and there is a greater incentive to invest in training. He does not believe there will be any adverse employment effects. Even so, the cost of the minimum wage will fall on the corporate sector, and quite substantially in areas such as retailing, catering, leisure services and textiles.

The national wage bill rises

The most affected sectors are those with a tradition of relatively low pay, and a high proportion of female part-time employment. Only later, even if one takes the Bain view, will the benefits come through in higher productivity from a better trained workforce. In practice, this may be easier said than done. Raising productivity in low-skilled, repetitive operations may be difficult. In any case, the suggestion that managers are only waiting for the minimum wage to come along before introducing productivity improvements is bizarre.

According to the Institute for Fiscal Studies, 5.4% (about 1.1 million) of all workers aged between 19 and 59 are paid under £3 an hour. For £3.50 an hour, the figures rises to 12.1%. For £4 it is 19.4%, and at £4.50 it is 26.1% (in each case, there are a disproportionately large number of women in the figures). Assuming (for the moment) no adverse employment effects, a 30-hour working week (which accounts for the growing number of part-time workers in the above figures) and hourly pay for those earning under £3 an hour averaging around £2.50, then the effect of a £3 minimum wage would be to add £1.1 billion to the national wage bill. At £3.50, assuming the average of those earning between £3 and £3.50 is £3.25, the additional cost is £2.9 billion. At £4, using similar assumptions, the wage bill goes up by £6 billion, and so on.

Using a slightly different method, BZW has come up with figures showing that the sectoral effect of a minimum wage of £4 an hour would range from an addition to the wage bill of 0.1% in transport equipment, through to 2.4% in textiles and 4.3% in hotels and restaurants.

The effects of the minimum wage on jobs and costs become that much larger, of course, if there are knock-on effects on differentials right up the income scale. This was the basis for earlier predictions that a minimum wage could eventually cost more than a million jobs. Unnecessary and potentially harmful though the minimum wage is likely to be, this figure is a considerable exaggeration.

One of the benefits of Britain's more flexible labour market is that the old rigidities concerning differentials have diminished. There will be some knock-on effects, but nothing like as many as there would have been a decade ago. But don't forget that part of the minimum wage bill will be picked up by the public sector, requiring higher taxation for the rest of the economy. And the minimum wage may also have the effect of driving more activity into the black economy, further eroding the tax base.

All-round dissatisfaction

The bottom line is that there will be some increase in employment costs for the private sector, possibly quite significant ones. The Low Pay Commission will deliberate long and hard and come up with a figure of, I would guess, between £3.50 and £3.75. The unions will be left dissatisfied, employers relieved because it could have been worse but still likely to take a harder-nosed attitude to the employment of the unskilled. For all its good intentions, the minimum wage will leave no one happy.

There are better ways of helping the poor, notably through increased use of 'in-work' benefits to top up low-paid jobs. As for employers, even a mimimum wage set low is a nuisance they could do without.

David Smith is economis editor of the Sunday Times.

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