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The minimum wage is broken – here’s how to fix it

2 April 2014

While welcoming George Osborne’s emphasis this week on raising employment, I have some caveats about his target – to have the highest employment rate in the G7. This isn’t hugely challenging. Those in employment currently amount to 71.2 per cent of the UK population of working age, well ahead of Italy (55.5 per cent), France (64.1 per cent) and even the USA (67.4 per cent). Germany, at 73.5 per cent, is the current table-topper and the one Mr Osborne aims to overtake.

Aggregates like this, though, are dodgy to interpret and are affected by differences in age cohort size and other factors.

For example, the rising numbers of younger women in the workforce with degrees will almost certainly boost employment rates in the next few years, as will immigration flows and the increase in the state pension age. It will then be difficult to discern exactly what part Mr Osborne’s efforts will play in any rise in employment.

No doubt his heart’s in the right place. But what’s he doing? He rightly points out that the public sector cannot really create jobs and that the private sector has to do the dirty work. Yet it can only do so if businesses find it profitable to take on extra workers, or extend hours for those they currently employ.

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They can’t do this if employment regulation continues to increase, as it has under the Coalition, with increases in parental and other leave, rights to flexible working, pension auto-enrolment, restrictions on employing foreign workers and agency staff, and threatened limitations on zero-hours contracts.

Another area where George Osborne is decidedly flaky is the National Minimum Wage. Although the government has accepted the Low Pay Commission’s recent recommendation, he is on record as wanting a more substantial increase. Other conservatives, notably Boris Johnson, are flirting with the Living Wage, an hourly rate dramatically higher than the NMW. As Ryan Bourne and I argue in our new IEA publication The Minimum Wage: Silver Bullet or Poisoned Chalice?, such ideas are ill-advised.

Minimum wages are poorly targeted to deal with poverty, with many beneficiaries in non-poor households while the real problem – as Mr Osborne realises – is those with no jobs.

We suggest regionalisation of the NMW, as its ‘bite’ varies so considerably around the country. While the NMW is less than 40 per cent of median hourly earnings in London, it is 60 per cent in Wales. To maximise private sector employment then, minimum wages could be set by region to reflect productivity and firms’ ability to pay.

We are also recommending abolition of the minimum for under-18s. With very high levels of youth unemployment, young people without skills need to be priced into work. We should of course be working to improve those skills – our performance in schools and collages is still far from adequate, as the British Chambers of Commerce pointed out again yesterday – but Mr Osborne won’t improve matters by listening to the ‘economics deniers’ who insist that wage levels have no effect on employment.

J. R. Shackleton is Professor of Economics at the University of Buckingham and editor of Economic Affairs. He is co-author of the Institute of Economic Affairs paper The Minimum Wage: Silver Bullet or Poisoned Chalice? which is published today.

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Show comments
  • Rhoda Klapp8

    Does the author truly think productivity and firms’ ability to pay are set by region? All over this country there are successful and productive businesses. Why pick winners amongst regions? Why give the greatest reward of lower pay to those who moan the loudest? Wherever you are there is a successful business near you, and there is no regional factor stopping you from being as successful.

    This owes more to the need for a professor of economics to think up new daft ways to nudge the economy than a real observation of what is happening. Regional victimhood is one of the curses of the UK.

  • HJ777

    “We are also recommending abolition of the minimum for under-18s. With very high levels of youth unemployment, young people without skills need to be priced into work.”

    Not much point, since shortly all under-18s will be obliged to stay in full-time education. Whether they should be so obliged is another matter.

  • AtMyDeskToday

    “our performance in schools and collages is still far from adequate”
    Yes, a decent course in flower arranging is what every young person needs.

  • Alexsandr

    He needs to do something about employment tax, i.e national insurance. Employers NI is a massive disincentive to employing people.

    • El_Sid

      Trouble is that employers’ NI is a hard tax for the likes of Google/Amazon to avoid (compared to eg profits tax), and NI in general raises a huge amount (just over £100bn from memory), so even quite small % cuts need to be paid for by either big tax rises or spending cuts. I’d also dispute that it’s a “massive” disincentive – I’d agree that no tax on employment is a good thing, but an extra 10% or so of salary when the total cost of employment can be up to 3x salary is fairly marginal in the decision to employ someone.

      Still, it would send a signal if NI was regionalised.

      • Alexsandr

        NI is avoided by the self employed etc. its only the mugs in full time employment who pay the full NI whack.
        and those with just non earned income pay nowt.

        • HJ777

          It’s not avoided by the self employed, although they do pay less overall perhaps reflecting lower eligibility for contributions-based unemployment benefit (JSA).

        • El_Sid

          So your complaint is that employers’ NI is only paid by those who employ other people?

          • Alexsandr

            employers NI is not really paid my employers, its paid by the employees. if an employer needs a new mole strangler, they will think, this mole strangler will bring in £x of benefit to my company. so I can afford a cost of employment of £y. then he will take off all the costs, like employers NI, sick pay liability etc. and come down to the cash wage he can pay.

            If there were no employers NI then he could offer a higher wage. Employers NI is not a tax on profit or turnover, its a tax on employment.Which means the employed have a higher tax burden then the non employed.

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