The minimum wage works, but is only part of the puzzle. We need to be more ambitious about wider economic reform
Another year, another drop. The odds are that the impending announcement on the new rate for the national minimum wage will see a further decline in its real value, meaning a lost decade for those on the lowest pay.
Wages right across the earnings spectrum have fallen, so many experts will greet this news with a shrug. But that’s unlikely to be the reaction of those toiling at the sharp end of the jobs market, where working poverty is escalating and people are living on ever tighter margins (even before the arrival of the majority of cuts).
It wasn’t supposed to be like this. From its modest beginnings in the late 90s the minimum wage climbed steadily. It eradicated the worst extremes of poverty pay and created a ripple effect that spread upwards and lifted the pay of those further up the earnings curve. Wage inequality between the middle and the bottom fell and the incentive to work rose. Like no other policy for a generation it blended sound economics, progressive ends and popular appeal.
Yet even before the recession struck, the national minimum wage had lost its mojo. For some years its declining fortunes were reflected in the paucity and predictability of public debate on low pay. That’s now changed. The enormous pressure on living standards is opening up fault lines across politics.
It’s led some on the left to lose faith in the gradualism of the national minimum wage and the Low Pay Commission – made up of employers, unions and academics – which oversees it. They favour usurping the late 90s settlement on low pay, replacing it with an externally imposed increase in the minimum wage to bring it into line with the far higher living wage (though it’s important to note that the living wage campaign itself rejects this legislative approach).
You can see the argument: as work by the Resolution Foundation and the Institute for Public Policy Research shows, big employers in some important sectors could afford to pay the living wage without it resulting in a major hit to their overall wage bill – in part because the bulk of pay is skewed to the top. Meanwhile, the potential savings to the taxpayer, owing to lower spending on tax credits and benefits and higher tax revenues, run into billions.
But leaping straight from the minimum wage to a statutory living wage would be a big roll of the dice, even in good times (never mind in a stagnant economy with high youth unemployment). Many small firms would struggle to adjust as they have less scope to absorb wage pressures through changes in productivity, profits or prices. And, crucially, it would undermine – probably fatally – the Low Pay Commission.
That would be a mistake. The national minimum wage is a rare example of an issue where evidence has triumphed over prejudice – particularly in a culture where the current is fast moving the other way. Recall that 20 years ago, the very idea of a wage floor was dismissed as voodoo economics by the then Conservative leadership, as well as most of business, who felt free to assert that it would cost millions of jobs. It didn’t – as the commission has demonstrated. There is now a near-consensus among economists about its benign impact.
It’s a belated recognition of this verdict that has spurred a new debate on the centre-right, with pragmatists from influential skills minister Matthew Hancock to key players at the Daily Telegraph moving beyond grudging acceptance of the existence of the minimum wage to making a more full-throated case for strengthening it.
True, these are still relatively rare voices. And, yes, they exasperate their numerous ideologically charged colleagues, who have a more sceptical approach to the evidence. But those from the Conservative side calling for more ambition in tackling low pay do so secure in the knowledge that they have politics, as well as economics, on their side. Some 72% of the public don’t trust the government on low pay, and when they were last asked the overwhelming majority thought the wage floor should either be higher or remain at its current level; only 4% said it should be lower.
What this flux means for policy remains to be seen. The risk is that today’s growing consensus around the importance of the minimum wage fails to move us beyond the current inertia. The opportunity? The increasing noise coming from a range of voices creates the necessary momentum for new policy ideas to gain traction.
Fifteen years after its conception the Low Pay Commission has plenty of hard-earned credibility; the question is how to deploy it. A starting point would be for it to have a remit that reflects its title: currently it’s a minimum wage-setting commission. That’s vital, but narrow, work. It should also oversee a low pay strategy that sets out the changes necessary – across skills, workforce organisation, and enforcement – to help ensure higher pay and improved progression over the next decade.
And it should grapple with the problem that often besets minimum wages: they increase only at the pace of the slowest. A wage floor that is affordable across all parts of the economy – from finance to farming – will by definition mean large parts of the economy are feeling no upward pressure from it. The commission is well placed to identify key sectors capable of sustaining higher wage floors, above the legal minimum, without damaging jobs. And all this should run alongside moves to bolster the living wage – extending its reach across the public sector, forcing companies to report on low pay and encouraging cities to take a lead by sharing the fiscal dividend with them.
Millions of working people on low incomes face the prospect of prolonged pay stagnation and falling tax credits, with only the mirage of future tax cuts. Rising living standards ultimately depend on wider economic reform, not just the minimum wage. But a stronger wage floor would give us something solid on which to build.