Chancellor of the
Exchequer, George Osborne, ended his budget speech to Parliament yesterday with
what has come to be the customary clever twist. Having told MPs he’d be removing
or reducing tax credits from several million ‘hard working families’ he sweetened
the pill by announcing a big hike in the statutory national minimum wage for employees
aged 25 and over, which will rise to £7.20 per hour from April next year and to £9 per
hour by 2020, thereby forcing employers to cough up extra cash in order to make
up the cut in the taxpayer subsidy to low paid employment.
Moreover, by rebranding
the enhanced wage the ‘National Living Wage’ he not only disguised the fact
that for many employees the guaranteed wage hike will be smaller than the tax
credit cut, leaving them worse off, but also wrong-footed potential critics who
find it hard to oppose the language of the Living Wage even though Mr Osborne’s
version is a lot less generous than the figure campaigners calculate individuals
need to cover the basic cost of living. This is currently estimated at £7.85 per hour,
or £9.15 in London where living costs are higher, albeit both these figures
will rise considerably once the effect of tax credit cuts are taken into
account. Living Wage campaigners have
thus at one and the same time had to welcome the Chancellor’s move, question it
for not going far enough, and been left having to persuade employers who might
otherwise have decided to opt for the full fat Living Wage not to settle for Mr
Osborne’s Living Wage Lite.
Consequently, the
main voices of opposition to the Chancellor’s belief that ‘Britain needs a pay
rise’ have so far come from sections of the business community who appear happy
to accept the austerity rhetoric of ‘all in this together’ if this means mass
downsizing of the public sector but not if their own finances are put on the
line.
To be fair, not all
business organisations are complaining and even those that are have been fairly
measured in their response to a government whose ideological stance they in general
support. Contrast this with what was being said only a few months ago when most
of these same bodies declared the Labour Party ‘anti-business’ for advocating
an £8 per hour national minimum wage by 2020. Nonetheless, the CBI still considers Mr
Osborne’s pay plan ‘a gamble’ which might cost jobs and thinks the jury is out
on the wisdom of his move. So just how much of a gamble is the Chancellor
taking?
A lot depends on whether
pay at the bottom end of the labour market is determined purely by the
interaction of demand for and supply of workers of given productivity or instead
to some extent reflects a power imbalance between employers and individuals. If
the former conditions exist employers are price (i.e. wage) takers in the
labour market – which increases the risk to jobs from a high statutory minimum
wage – if the latter, employers are price makers, in which case there is less
risk to jobs.
It’s not clear whether
the Chancellor’s decision to introduce the National Living Wage is based on
some such assessment of the workings of the labour market but he does say he
has been influenced by the findings of an independent commission set up in 2013
by the Resolution Foundation think tank to look into the future of the national
minimum wage and the role of the Low Pay Commission (LPC) under the
chairmanship of Sir George Bain, who was first Chair of the LPC when it was
formed in the late 1990s. The commission published its detailed recommendations
in March 2014 (and here, as a member of the commission, I should declare an
interest).
After an extensive
review of available evidence the Resolution Foundation commission concluded
that there was a strong case for government to ask the LPC to be more ambitious
in its approach to raising the minimum wage and it now appears that the
Chancellor agrees. This doesn’t of course mean that one can take a gung-ho
approach to the minimum wage, nor indeed that politicians should from now on feel
free to raise the minimum without reference to the LPC (a fear expressed by
some in the past 24 hours, though I think the Chancellor’s actual intention is
in fact to enhance the LPC’s remit). But regardless of this my view is that any
risk to jobs from the National Living Wage (NLW) at the level proposed by the
Chancellor is minimal, although the policy does raise a variety of attendant considerations.
In keeping with the
consensus of econometric analysis, the employment impact of the NLW as measured
by jobs is likely to be close to zero. This is mainly because the NLW does not
cover young workers (i.e. under 25s), the group most adversely affected by high
minimum wages. The initial estimate of
the Office for Budget Responsibility (OBR) thus suggests a negative employment
impact of around 60,000 – tiny in a UK labour market of 33 million people which
is currently creating jobs at a very fast rate - and a 0.1 percentage point increase
in the estimated structural unemployment rate. Jobs at greatest risk are those
in sectors with the highest incidence of low paid workers – in particular retail,
hospitality and care – while over 25s may lose out relative to younger workers
(a potentially beneficial job displacement effect given the high rate of youth
unemployment).
It is possible,
indeed likely, that employers will adjust to the NLW by cutting hours of work
instead of, or in addition to, cutting jobs, which for those affected will to
some extent offset the effect of a higher hourly wage on people’s weekly or
annual earnings. The other adjustment alternative, raising labour productivity
at given hours so that the NLW ‘pays for itself’ sounds good in theory but
rarely shows up in econometric evidence.
This effect of
minimum wages on hours is very difficult to assess (the OBR reckons the NLW will reduce hours worked in the economy by 4 million per week) but I think a big potential concern
is that the NLW might act as a further incentive to employers to increase their
use of zero-hours contracts – which are already very prevalent in sectors where
the NLW will bite hardest - in order to minimise the impact on total labour
costs. Such a perverse effect would flout the spirit of the new NLW but is an
outcome one might expect in a lightly regulated labour market where it remains easy
for employers who so wish to hire workers on the cheap whatever the level of
the legal minimum wage.
