With the Chancellor’s announcement that he intends to raise the minimum wage to £7.20 soon and by 2020 raise it to £9.00, creating what he terms a “national living wage”, which will be fully enforced irrelevant of business size, employee numbers or company turnover, it seems that the Chancellor has moved completely away from any economic rationality and straight into the world vote-buying and political pandering. Of course the kind of political nonsense that is the living wage could be funny if it wasn’t so serious. Low-skill employees, particularly those who have just finished apprenticeships and those who have been in long-term unemployment, as well as young workers will be at huge risk of job losses, with the Office for Budget Responsibility predicting job loss numbers of 60,000 as a result of this politically motivated wage hike. Further it will slow job creation, as small businesses won’t hire as much and larger businesses will consolidate their employment until such time as it becomes profitable to hire again.
We can already see the adverse effects of large minimum wage hikes when we look at employment among 16-17 year olds and 18-21 year olds. The unemployment rate for this group has gone up or floored consistently since late 2000. As ONS data shows, unemployment in this demographic usually jumps when the wage rates in these areas are raised. The Low Pay Commission have noted this effect, and have constantly warned against unfunded wage hikes as they are most likely to cause unemployment among the lowest-skilled workers. The youth unemployment figures for the UK demonstrate this perfectly. Now there are many people who may say that when the minimum wage was first introduced in 1999 that employment among the lowest-skilled wasn’t affected. Now figures already show this to be wrong for a multitude of reasons, such as the masking effect of increased economic inactivity as well as businesses using more marginal forms of employment, such as part-time or zero hours work. However, even if we assume they’re correct they’re missing a major issue in the economics of the minimum wage, which is that when the minimum wage is higher than 45% of the average wage of a certain demographic, unemployment and minimal to no job creation become very real phenomena. Tim Worstall in his work on the minimum wage has shown this to be the case with youth unemployment, where the 16-17 year old wage rate is 76% of that demographics average earnings and the 18-21 year old rate is 65% of the average earnings. These figures go a long way in explaining why youth unemployment has been continually increasing even during periods of significant economic growth. With Osborne raising the minimum wage initially to £7.20, he comes very close to hitting nearly 50% of the average earnings of a UK adult, which according to the ASHE 2010 wage survey was £14.99. Now obviously wages have gone up since then but not by much. We also have to remember that these figures are skewed due to very high income variables, and that the average wage of a low-skilled adult would most likely be less than £14.99. Thus if Osborne moves to £7.20 initially, he will create more unemployment amongst the lowest-skilled. Further, this potential trend of unemployment and slowed job creation will continue across the parliament as Osborne looks to raise the minimum wage to £9.00.
However, these are just the microeconomic unintended consequences. There are also macroeconomic and fiscal consequences. In terms of macroeconomic consequences, there will be increased long-term unemployment, as most of this demographic have little job-related skills that can make them employable. This in turn will increase the welfare bill, as there will be more unemployed people, as well as more non-university educated 18 year olds who will become economically inactive due to a reduction in employment in sectors like retail and services. It will also mean government pouring more money into apprenticeships, thus increasing spending. Also, because many new apprenticeships aren’t on-the-job, many young people completing apprenticeships might not be able to find full-time employment. Finally, small businesses will bear the brunt of this wage hike, meaning less small business growth and the continuation of an uncompetitive, stunted labour market with minimal wage competition and more wage ceilings for large businesses and corporations to exploit. As mentioned previously, the fiscal consequences will be increased government spending in welfare as well as apprenticeships and business grants to small businesses.
Overall, this policy shows how a stupid, stultified political climate creates unintended consequences. And it’s not as if these consequences weren’t known about. The LPC as well as a multitude of academic studies have shown that large minimum wage hikes hurt the poorest and most precarious in a society. For this policy to come from a party that is describing itself as for the workers is beyond astounding, and shows just how low one will go to win votes. More depressing than this is that this policy will most likely prove to be popular.