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Increasing the minimum wage ignores economic realities

15 April 2013

In economically uncertain times, we should strive to remove all blockages to employment, not create more. The national minimum wage is one such blockage. Whilst forced pay hikes may privilege those in work, they make it much harder for those outside the labour market to get their feet on the employment ladder.

In times of plenty, the impact of pricing employees out of the labour market were less dramatic, but in harder times, it becomes a considerable barrier to employment. This is a real problem, and today the government raised the rate by 12p an hour to £6.31 for adults.

Employers, especially smaller businesses with fewer resources, will often be unable to pay the minimum wage. The scale of the rise – a 2 per cent increase, more than 50 per cent higher than current average pay growth – will add considerably to business costs and disincentivise companies from hiring additional staff. There are swathes of jobs that need doing, but in the current economic climate many simply cannot justify a wage of £6.31 per hour.

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Making it illegal to offer work at a level below this will not just make life difficult for businesses and growth, though. It will, in fact, have the strongest effect on the vulnerable – the old, the young and the poorly educated.

Many of these people will struggle to find work because the minimum wage prices them out of the jobs market. Extended unemployment will see skills deteriorate and their productivity fall further. This vicious circle results in an ‘insider/outsider’ labour market, entrenching unemployment amongst certain groups.

The regional breakdown of unemployment provides evidence of the negative effects of the minimum wage. If the government finds it too politically unpalatable to scrap the NMW entirely, it could at least look towards regionalised levels. In its current form, it is a blunt instrument, which takes no regard of the wide variation in labour market conditions around the country.

With stagnant growth and productivity, maintaining the current minimum wage structure is a triumph of political aspiration over economic reality. At a time when the government are rightly reforming welfare to ensure that those on low incomes have an incentive to work as opposed to claiming welfare, they are missing one key problem of the labour market. You can only get people off Jobseekers’ Allowance if companies are willing to foot the bill.

The real poverty in society lies with those who are not in work at all. This increase in the national minimum wage will do nothing to improve their chances of a job – rather the reverse. While the coalition government insists that growth is a top priority, it is once again embracing a policy which will impede economic growth rather than encourage it.

Stephanie Lis is Communications Officer at the Institute of Economic Affairs.

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  • Stephen Hodgson

    It needs scrapping altogether if we want a cohesive society.
    It protects those with jobs but denies the rest any chance of a job, the very ones it is supposed to help.
    In addition it prevents employers training people up themselves so we now have the massive cost of using public money promoting training providers and expensive get back to work schemes, but their are no jobs to go to.
    The best training is carried out by workers getting experience with an employer and moving up the ladder even if they do start on £2 per hour sweeping floors.
    Nowadays they want £6.32 before they know or can do anything.

    The lack of cohesion in society is the great divide opening up between those with a job and those with no hope of ever getting one. Gangs, youth culture, reliance on benefits, poverty in old age all symptoms of this trade union inspired policy.

    And no growth won’t be affected by its removal another fantasy. In fact growth will improve because growth is a factor of how many people have jobs not how much money per hour you are paid.

    If everybody was paid £50 per hour, does that increase growth, no because then hardly anyone would be working ?!

  • oszolom

    A week ago not very smart article defending thieves-bankers, now propaganda against working people. How much Miliband pays to Spectator for this anti-Tory campaign?

  • Ytongs

    The first thing that happens with a minimum wage is that no-one will employ anybody who is not demonstrably worth that sum. You cannot make someone worth a minimum wage by making it illegal to pay less. You also forbid those jobs that need done being done because they are now just too expensive.

    You might think that all a company has to do is charge its customers more but this might not be as easy as you think. Some companies might be capable of doing this easily some might not. Not all companies operate with the same margins at the same time. Some companies, especially in this economic climate, struggle to exist.

    Most of the posts here seem to work on the assumption that a wage has by some divine right to be sufficient to live on. It isn’t. It is the exchange of labour (like any other commodity) for what you can get for it. What is missing in this benighted country are the sorts of jobs that pay the wages that you aspire to. But then we mis- managed, government interfered and unionised all those away didn’t we? Now we are trying to raise wages levels by government decree.
    I love it when someone below posts “that a company doesn’t deserve to be in business if it can’t pay a living wage” Dream on.

    Why they don’t just ask for £20/hour beats me. After all people deserve to have a decent income don’t they? We have a moral duty to do this.

    • Dogsnob

      No we don’t have any moral duty whatsoever. We do though – if we want the economy to prosper once again – have to show workers that the system can offer them a way out of their financial misery if they work hard. To repeatedly find that hard work leaves one poor, is not the answer.

  • Mark Moore

    If only it was worth 12p per hour to minimum wage workers. Your typical 40 hour per week minimum wage worker will see only £3.26 per week, just over 8p per hour.

    Lost in all of this is the other main beneficiary – the Treasury. They will see £2.21 per week, about 5.5p per hour.

    Hang on, 8p, 5.5p. That’s more than 12p, I hear you say. Yes, well that’s because you always forget about Employer’s NI – the worst of all our stealth taxes.

  • Teacher

    Good grief! 12 pence an hour! It’s hardly a fortune, is it? Inflation is rampant at the moment, far higher than official statistics suggest for ordinary items that poor people need. I would wager that were Stephanie Lis offered a pay-rise of 12 pence an hour she’d be outraged. My son, who is a highly intelligent grammar school graduate is on the minimum wage for working three days a week for a charity, the only job he can get in this awful economic climate. He’s not going to be partying on the extra 84 pence a day.

    • HJ777

      You miss the point. Higher minimum wage reduces the number of jobs, so although some people will benefit from a higher minimum wage, others will lose because it prevents them from getting jobs.

      • Teacher

        No, I get that. The charity might well decide it can’t afford my son if it has to pay another pound a day. They could appoint an unpaid intern. And then when the interns were all fed up with working for nothing the employer could move to another country paying starvation wages. Simples.

        • HJ777

          Economics operates at the margins. Some jobs will inevitably be lost as minimum wage rates are increased – they must be (it is debatable how many are lost at what minimum wage rates, but job losses there will be).

          One of the reasons for the rise in internships in recent years is that young people often just aren’t worth minimum wage rates to employers. So they only way that it is worthwhile for an employer to take them on is unpaid (because it is a choice between no pay and minimum wage – they don’t have the option of paying them somewhere in between). This means that poorer young people miss out on gaining workplace experience, because only people from more affluent backgrounds can afford to work unpaid.

          • Teacher

            I quite agree with you. Young people are useless and don’t deserve to be paid and it is terriblly unfair that poorer young people don’t get the chance to be as useless as their more prosperous, spoilt fellows.

            • HJ777

              You are entirely missing the point.

              Nobody is obliged to employ anybody. You would criticise employers who would employ people at below NMW but, presumably, you wouldn’t criticise them if they simply chose not to employ them at all. What are you doing to help those young people become employed?

              If a young person wants to offer their services at a price an employer is willing to pay, then the law simply prevents them from doing so if that price is below NMW. Therefore, they stay unemployed. They can get neither wages nor work experience unless they are willing to work for free to get the latter. Do you really think that it is right and fair to make it illegal for people to offer their services at a price which means that they can sell them? Have you no morals?

              • Teacher

                No, really, I absolutely understand what you are saying.

              • Dogsnob

                Morals don’t come into it. The numbers are king here. Yes, you are right in that nobody is obliged to employ anybody. They only hire staff in order to make money and those staff only take a position which pays enough to make life economically viable.

                This is the basis upon which we have ‘an economy’.

                You seem to think that people will work for sums lower than they need in order to survive and to simply pay their bills. They won’t and they aren’t and that is why we do not have a fully functioning economy.

                The reality is that successive waves of immigration, coupled with woefully inadequate education of our own people, have pushed them up against a wall. You appear to be happy to keep on pushing.

                • Daniel Maris

                  No, you’re wrong. In lots of companies posh kids get hired by their posh mums and dads and get paid. They don’t add to the value of the company. This idea that everything is done according to Adam Smith’s perfect markets is the smelliest form of BS we are subjected to. People are getting real.

                • Dogsnob

                  Daniel, are you sure you are replying to my post? A bit of a disconnect that’s all. Who mentioned Adam Smith or implied that markets are perfect?

            • Daniel Maris

              I like your style! These people need to get real. They are living on another planet where disposable income hasn’t been declining for most people over the last 10 years.

            • HJ777

              Explain please why minimum wage rates for the young in the Netherlands are much lower than here and they also have only half the rate of youth unemployment. The normal minimum wage in the Netherlands is similar to here (slightly higher, in fact) and overall unemployment is slightly higher too.

              If that isn’t evidence of the effect of a too high minimum wage on the young, I don’t know what is.

          • Daniel Maris

            You’re so detached from reality, you don’t count any more.

            You would have been saying the same stuff when the minimum wage was introduced. There were none of the disastrous economic consquences then predicted by people like you.

            • HJ777

              I do not recall predicting “disastrous economic consequences”.

              It is unquestionably true, however, that there are fewer jobs if you enforce minimum wage rates. The only question is how many fewer at which particular rate. If you set the minimum at £1/hr, the number fewer will be negligible. Set it at £20/hr and the consequences for the number of jobs will be huge.

              It seems peculiar that you would prevent somebody (especially young people) from offering their labour at a price that would get them work (and experience). You prefer to keep them in enforced unemployment?

              You may care to look at the Netherlands where they have minimum wage rates for those 22 or under which are age-dependent but which start at much lower levels than in the UK, especially for the youngest. Then I suggest that you look at the unemployment levels for the young in the Netherlands which are much lower than here. Then tell me that minimum wage for young people in the UK isn’t a barrier to employment.

              Daniel Maris describing me as “detached from reality”. You really have no sense of irony, do you?

        • Daniel Maris

          Well said. That is exactly the economy that Osborne is trying to create.

  • Anthem

    “If the government finds it too politically unpalatable to scrap the NMW entirely, it could at least look towards regionalised levels. In its current form, it is a blunt instrument, which takes no regard of the wide variation in labour market conditions around the country.”

    And to take this argument to its logical conclusion – allow firms to set their own wage levels! Just like it was before.

    It’s all very well increasing wages but wages are a cost to a business so if costs are increased then the price of their goods and services must increase to cover it meaning that everyone has to pay more for things (even those who just got the NMW “payrise”) which makes our products more expensive than those imported which makes our industry uncompetitive which means firms go to the wall which means unemployment.

  • BigAl

    The minimum wage is not the issue for business. The real problem is letting staff go when the business is failing for whatever reason. You can’t keep people employed in the private sector if the company is not making enough money. The public sector rolls out the union dinosaurs to make sure public sector companies plod on but private sector companies go under if debt and cash flow is not actively managed.

  • dalai guevara

    This is horse excrement – the same people who would like to see the work time directive disappear object to decent minimum wage levels. What do you chaps want?

    80h working weeks on 6 quid an hour to pay the £1,200 a month Rigsbys?

  • Smithersjones2013

    The real poverty in society lies with those who are not in work at all.

    Presumably that doesn’t include those who can qualify for up to £26,000 per annum in benefits?

  • Jamie

    Quite right Stephanie. The future prosperity of this country clearly lies not in aping the high-skilled, high-wage economies of Northern Europe but in a race to the bottom against the low-wage BRIC economies. But first we need to increase our landmass and population by 1000 fold….hmm. That’s the tricky part I fear.

    • Dogsnob

      Just for a second I took this as a straight comment. The spirit of Nigel Lawson just will not lie down!

    • HJ777

      High wages have to be earned through high productivity. There is no point just trying to impose them.

      • Jamie

        How do you propose we increase productivity? I suggest a German model with nurturing from the government in the form of seed finance (e.g. in green energy), representation of workers at board level so we stop playing out the Norman vs Saxon class struggle at the expense of cooperative and consensual mutualism, a change to the way we pay dividends and renumerate directors so that companies are encouraged to invest and plan for the long-term. Or we could do the Tory method of reducing wages to 2nd world level to increase short-term profits. But we’re not that stupid, are we?

        • HJ777

          I suggest fewer regulations, lower taxes (and govt. spending) and ignoring people with pet ideas about how government can direct us to be more productive.

          • Jamie

            I see. ‘Pet ideas’ because they don’t fit your fantasy as to how economics should work dammit – and never mind the evidence that North European economies do much better than us – Germany and the Scandinavian countries all spend a higher level of GDP than us and all have higher standards of living.,–U-S-drops-time.html,, – I doubt you’ll read them. Right-wingers are generally intellectually dishonest and don’t like to test their faith in the free-market with perfidious knowledge. I wouldn’t care except Osbourne is equally ideological and nonsensical.

            • HJ777

              “Right-wingers are generally intellectually dishonest”

              Well, obviously I must be wrong then if that’s the case. Can’t argue with such a devastating intellectual argument.

              P.S. German public expenditure 2011 – 45.6% of GDP. UK public expenditure 2011 – 49.0% of GDP. Source: Eurostat.

              Neither Sweden nor Germany suffered 13 years of New Labour raising expenditure as a proportion of GDP – they were cutting it.

              • Jamie

                You picked a year when 1) the Tories are in power 2) they are spending a huge proportion of GDP because of devastating unemployment and a commensurate low tax-take. The money has to be spent on sensible things – i.e. investment rather than keeping people sitting on their arses, wasting their lives and draining the economy as the unemployed are now as did the 4 million added to out-of-work-benefits under Thatcher. What I said re intellectual honesty was a crude generalism I admit but I have to say I stick to it – and I did say ‘generally’. Ken Clarke is one of the few high-profile Tories who isn’t a dissembler. Thatcher of course was simply mad.

                • Jamie
                • HJ777

                  I picked the most recent year for which figures were available. The German government have been spending a lower proportion of GDP for some years. The current situation was inherited from a Labour government.

                  The problem is not with “right-wingers” it is with you and what you consider to be “your experience”, which merely reflects your prejudices and limitations.

  • Andy

    The State shouldn’t be regulating wages. That’s a matter between consenting adults.

    • Dogsnob

      But the state is regulating wages when it floods an already burgeoning surplus labour force with foreign workers. It is a tap which should be turned off immediately.

      • Andy

        Should never have been turned on in the first place. It was yet another crime of the Labour Party.

  • cornelius

    although no one seems to want to say it – the reason the reason wages are so low for unskilled jobs is immigration. Up until the early 80s/90s it was still possible to earn a reasonable living doing unskilled work – not really possible anymore.

  • Makroon

    It looks like a bone thrown to the Libdems, I wonder whether there’s a quid pro quo.

    • Smithersjones2013

      Libdems don’t speak Latin…….

      • Jamie

        You mean ‘understand’ Latin. No one really speaks Latin anymore.

  • samuelafugglas

    What kind of a signal do I give if hireing an overeducated person for the minimum salary. The “poor” woun’t even get a chance to a decent job!

  • Dan Grover

    A huge proportion of the growth in jobs comes from small to medium sized businesses, not large corporations. Large corporations may well account for a huge proportion of UK business profit, but they don’t provide a proportionate number of the jobs. So linking large corporate “hoardings” is a bit of a strawman, as – big as a problem as that is – they aren’t the ones who’ll be chiefly affected by this change, it’s the smaller business who are far less able to afford the change but nontheless provide so many of the jobs.

    Further to that, people are saying “Minimum wage is already the bread line” – well, yes, it is, and to some degree that’s to be expected, since it’s the absolute lowest pay one can get and is typically found in jobs that, with a few weeks training, almost anybody that’s physically and mentally able is capable of doing. However, what not many people recognise is that such jobs are often taken up as a second job in a household, or by young people still living at home. To them, the prospect of working for £6 an hour is remarkably more attractive than not working.

    Minimum wage jobs are never going to be the major lynchpin of the economy and so changes to the minimum wage is never going to make or break the economy, but it can still help or hinder it. For the vast majority of businesses, the question comes down simply to this: Would you rather have fewer people in work earning more money, or more people in work earning less money? If our primary employers in the UK were large corporations with huge profits, it might not be such a quasi-zero-sum-game dichotomy, but that isn’t the case. Unemployment wasn’t too bad after the minimum wage was brought in – unless you look at youth unemployment, which is the chief demographic likely to be affected by minimum prices on their labour, as they have the least skills and experience to offer. Whilst every other demographic saw unemployment fall, youth unemployment stayed almost identical. Now, 15 years on, we’re seeing a similar thing happen across the board as the potential profits lower and thus the risk of new staff increases having the same affect as lower skills and experience did 15 years ago.

  • Troika21

    Such a pittance of an ‘increase’.

    Maybe the Government thinks that the NMW is a benefit?

  • Dogsnob

    Just how far below £252/week would you like to see the ‘poorly educated’ try to survive on, Stephanie?
    Think on now: it’s not everyone has got a well-heeled Mummy and Daddy to help out with those nasty bill type things.

    • Russell

      If 12 pence an hour is a considerable barrier to employment, then those companies will not, and don’t deserve to be in existence for much longer.

      • HJ777

        Ever heard the expression “economics operates at the margins”?

        Your argument could easily be applied over and over again repeatedly. Let’s just keep increasing it every week by 12p/hour, shall we?

      • telemachus

        But the 12p per hour makes a big difference when a loaf of bread has gone up by 10p and a pint of milk 8p
        And these are just the staples
        When a birthday comes round a minimum wage mother is at her wits end to organise a small celebration let alone a present
        While Hornby trousers a magnificent HBOS pension

        • HookesLaw

          The two are not linked, but the lack of savings by people for their old age is a big problem. Pity Brown did not realise it.

        • Radford_NG

          And if unemployed benefits go up at 1% instead of the rate of inflation that decreases the buying power of the unemployed at a rate of one loaf of bread and one bottle of milk per. week;unless I misunderstand things somewhere.

        • Russell

          I think you are replying to the wrong comment. I was actually saying a 12 pence increase should not damage any company that is in a reasonable financial condition.

        • Makroon

          Why do you say Tommyrot, then agree with Russell ? Force of habit, is it ?

      • HookesLaw

        Correct and if wages were that bit less the benefits bill would be that bit more.
        No doubt if a persons productivity were greater so would the wage.

        How long do people stay on the minimum wage for any length of time and how soon do they pass through it onto a higher wage?
        How many are say under 23 and how many of those are living with families with some not insignificant income?
        How many on the minimum wage are say part time voluntary workers? Possibly already in receipt of a pension.

        How many lefties have a slanted bigoted picture of the minimum wage recipient?

        • dalai guevara

          Interesting point.
          So then let’s just create some 1€ jobs and top up the income of the precariat by taxing the rich – you see, this concept has existed and has been applied in other places for years.
          But then again, we cannot do that. Our millionaires just got their £50k rebate and can expect a second homes subsidy. The concept we follow ad nauseam is called ‘trickle down Britain’.

          You cannot have it both ways HL. This government has simply chosen the wrong path.

      • Count Dooku

        Both of you have missed the point. The whole point of the article is that the NMW acts as a BARRIER to gaining employment. It’s good if you already have a job but not so good if you’re on the dole will little skills.

        The last thing the govt should be doing is raising NMW if they want to reduce unemployment. More pressingly, they should extent the lower boundary from 21yrs to 25yrs. Watch youth unemployment fall then.

    • HJ777

      I’m not sure that I understand your point.

      If the minimum wage prevents an employer from offering you employment at all, won’t you be even worse off?

      • Dogsnob

        Point is, people work for money. They only do that because the amount they earn, pays their bills. If you earn £252/week, then you are at that point at which subsistence is tenuous and outgoings account for all or more of earnings. The figures don’t stack up. It’s at this point that people make a decision whether to join the great benefit pool.
        Next step of course is to remove said benefits. Then stand by for the next decision they make. And buy yourself some good security.

        • HJ777

          That doesn’t make sense. If someone needs more than £252/week to live on, then surely it is better for them to earn £252 per week and then for benefits to be used to top this up by a modest amount, rather than to have to totally support them on benefits.

          Not only is this cheaper for the taxpayer, but work gets done that wouldn’t otherwise get done.

          • Dogsnob

            I see. So you are in favour of a layer of private business being able to tap into the state to fund its wage bill?

            • HJ777

              No, but I am in favour of helping people who will work but can’t earn enough to live on.

              It’s rather better than paying them more to do nothing, don’t you think?

              • Dogsnob

                But the one becomes the other? Surely you see that? We are talking about the State paying a large part of the wage bill for low pay employers. That’s not going to get ripped-off now is it?

                • HJ777

                  No, the state isn’t “paying part of the wage bill”. It is helping support people who, it feels, do not earn enough to live off.

                  You talk as if an employer should be obliged to pay people more than their market value. If you do that, then the employer simply won’t employ many of them.

  • Mike Barnes

    Minimum wage is already subsistence living, what’s the point in cutting it further and creating jobs, if they don’t pay enough to live on?

    People will just be claiming more from the government instead, housing benefit or tax credits.

    You are effectively telling corporations to continue hoarding record profits, but don’t bother paying your employees well, the taxpayer will pick up the slack.

    • Matthew Blott

      Yup, socialism for big business. It falls on deaf ears here though.

      • HJ777

        The vast majority of employment, especially low wage unemployment, is in small companies.

    • HJ777

      Because if the alternative is unemployment, then they will be claiming even more from the government.

  • itdoesntaddup

    The stupidity is adjusting the NMW by such a derisory sum that will simply incur large administration costs all round.

    • HookesLaw

      2% a derisory amount?

      • Radford_NG

        Compared to admin.costs.Why not stop taking PAYE each week from the low paid whilst paying them Tax Credits?The entire system,which started 220 years ago to finance the wars against General Bonaparte,needs rethinking from the bottom up.

        • HookesLaw

          The govt ‘are’ stopping taking PAYE from the low paid. Fewer people should pay income tax and the rates should be lower and the bands set higher.
          Sadly for now we have a slight problem with deficit and debt which needs to be brought down.
          Actually I think with VAT at 20% the govt have laid the first stone in a move to build a new lower income tax regime.

          • Andy

            It is called a Flat Tax. And it is long overdue.

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