Tag: minimum wage

The Minimum Wage: Part III

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Angus Dent
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This morning, MPs backed George Osborne plans for £12 billion pounds of cuts with a majority of 308 to 124. The Chancellor had previously reiterated his support for Harriet Harman, the interim Labour leader, who had called on her party’s MPs to support the recent welfare reforms put forward in the Conservatives’ latest budget. In an impassioned opinion piece written for The Guardian, Osborne was quick to highlight his plan to cut corporation tax but raise the minimum wage to £7.20 per hour with a view to eventually reaching over £9.00 per hour by 2020. While the Labour Party oppose other aspects of the welfare bill, such as changes to Employment and Support Allowance, Osborne hopes that progressive Labour MPs will support the Budget’s attempts to stimulate economic growth.

As mentioned previously, the effect of such a great hike on the minimum wage will have a huge effect on SMEs, particularly if there is no attendant increase in productivity. While productivity in the UK has begun to rise, this is probably by too little and too late. The new wage equates to a £1300 per year salary rise, and unexpectedly eclipses the £8 per hour figure offered by Labour during the election. However, he has pledged to cut corporation tax to 18% by 2020, the lowest of any G20 country. So if, hypothetically, the tax reduction offsets the higher wages, everyone is a winner. However, undoubtedly it will be smaller, less profitable businesses with tight margins, paying little corporation tax that will feel the pinch the most. Small companies who pay the majority of their employees the minimum wage will undoubtedly have to restructure their costs which will inevitably lead to redundancies. Meanwhile, the more progressive large companies, IKEA in the vanguard, have said they will be able to introduce the new minimum wage early. To compound the bad news for SMEs, the issue of late payments again was ignored, along with any discussion on business rates and rents.min wage iii

The Conservatives who opposed Blair’s original introduction of the minimum wage in 1999 were proven wrong; it remains to be seen if Osborne’s decision will silence the criticism of some factions who claim he is a Chancellor who lets politics dictate his economic decision making. After all, there is a huge risk that the UK’s higher labour costs, particularly without an increase in productivity, would drive businesses to look to competitor economies, leading to further job losses and widespread business closures. It would certainly take a very brave Chancellor to renegade on a promise that affects an estimated 2.7 million people nationally.

The Minimum Wage – Part II

Author
Angus Dent
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If searching for a segment of the UK labour market that would be disillusioned with a rise in the National Minimum Wage, the Small and Medium-Sized Enterprises (SMEs) sector is the obvious place to start. Defined as those businesses with no more than 250 employees and a turnover below €50 million, the members of this group are likely to offer lower wages and be less able to absorb an increase in wage costs than many of the nation’s larger firms. Surprisingly, a recent report has shown that a number of SME business leaders hold a remarkably sanguine outlook on the 20 pence rise in the minimum wage coming into force this October – the largest rise in real terms in 7 years.

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The report found that the directors of these smaller firms believed the static wage environment since the financial crisis, the lower costs of fuel and the favourable exchange rate with the Euro had made dealing with increasing overheads easier. They also recognised that their competitors in the UK would be facing the same challenges and appreciated the more general virtues of a sensible minimum wage for society at large. These individuals’ magnanimity in the face of increasing business costs is well-founded, as a paper published this February by the National Institute of Economic and Social Research and Centre for Macroeconomics, which analysed historical company data, states that “labour cost increases amongst low-paying firms may have been met by increases in labour productivity.” A point borne out further by a Financial Times columnist, who argues that the gradual rise in the minimum wage might have brought in better workers with better morale, and that this phenomenon could explain why the job losses predicted by opponents of the minimum have largely failed to take place.

A rising minimum wage has not been positive for businesses in every case though; a fact accepted by the man who first established the benchmark in 1999, Professor Sir George Bain. Some unemployment has occured in a few sectors, such as social care, where many are paid very low wages, and Bain notes that if the minimum wage were raised now to meet the ‘living wage’ – around £7.65/hour – then “widespread job losses” would likely follow.

This brings us then to the timely matter of this year’s General Election, and more specifically to the question of how prudent the minimum wage pledges made by some of this year’s election hopefuls appear to be. The mainstream left-wing parties all seek to raise it considerably, but the Green Party can be marked out for its particularly aggressive plans for the measure, with suggested increases to 60% of net national average earnings, £8.10/hour, rising to £10/hour by 2020. The party’s plans to raise the minimum wage in such a manner would seem to be built on assumptions that due to the net positive effects seen so far, the level at which it is set does not matter. This is surely misguided. The benefits that the minimum wage has created so far derive from the cautious approach taken by the Low Pay Commission when advising the government on an appropriate level at which to set it. And looking back to Bain’s warning, it would seem clear that there is a level at which the minimum wage will become counterproductive. To abandon the principle of caution when setting it, as planned by a number of this year’s candidates, poses a real threat to the health of the British SME sector.

The Minimum Wage – Part I

Author
Angus Dent
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Ask any individual in Britain today for their opinion on the Blair administration and the Iraq War will undoubtedly be mentioned. Indeed, whilst twelve years have now passed since the controversial decision was taken to prosecute this war in the Middle East – on the pretext of seeking out so-called ‘Weapons of Mass Destruction’ – the fallout is still being felt, with news of the atrocities being committed by the terrorist groups that have since filled the regional power vacuum keeping this decision under continual scrutiny. But to allow this conflict to colour New Labour’s entire tenure is unfair, as it obscures the fact that at least one of this government’s policies, the introduction of a National Minimum Wage, has been an unqualified success. In fact, as the point scoring between parties has escalated in the run up to this year’s general election, this issue has remained at the very forefront of political discourse.

The National Minimum Wage originally came into force in April 1999 and set the hourly wage floor for workers over the age of 22 at £3.60/hour, rising since to £6.50/hour. The scheme was developed to combat poverty by ensuring that a basic wage would be provided for all workers, an issue deemed particularly important in the face of the dwindling membership of trade unions. Labour enjoyed support from the Liberal Democrats on the issue but were opposed by the Conservatives who, following economic arguments propounded by Milton Friedman and others, feared that it would add to business costs and lead to job losses by distorting the labour market.

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Time has shown those opposing the scheme to have been misguided. A report from the Royal Economic Society credits the minimum wage with directly raising the wages of 5% of workers and indirectly raising the wages of another 25% due to a ‘spillover’ effect, noting further that the feared job losses failed to materialise. As such, they make a strong argument for viewing the introduction of the minimum wage as ‘one of the most successful market policies of recent times.’

Parties across the political spectrum have been receptive to this success, with Conservative opposition dissipating and no mainstream entities now looking to revoke the measure. That is not to say, however, that this year’s candidates’ approach to the minimum wage is uniform. The incumbent government has already pledged to increase the minimum wage to £6.70 in October of this year, but the Conservatives and UKIP are focused more keenly on removing low earners from tax than increasing the size of their paychecks. The left-leaning parties, on the other hand, would look to greatly increase the minimum over the coming years with Labour, the SNP and the Greens all targeting at least £8/hour by 2020. The likelihood of a coalition resulting from this year’s election muddies the waters of these pre-election promises, as compromise is inevitable. But with some mooting increases to the minimum wage far sharper than has ever been seen before, the debate moves to what effect this would have on businesses.