Economics of Covid-19 – April 1st Living Wage hike could prove to be fools gold

The statutory National Living Wage increases by 6.2% tomorrow, rising to £8.72 an hour for employees aged 25 and over, benefiting around 2 million people. The lower National Minimum Wage rates for younger people go up 6.5% for 21 to 24 year olds and by 4.6% for the under 21s. That’s right, tomorrow, in the midst of a national economic crisis. A brave move, demonstrating how even Conservative governments have been fully converted to the merit of minimum wage regulation, or foolhardy at a time when many businesses are struggling to survive and millions of people are worried about their jobs?  

As in any crisis there will be winners as well as losers over the coming weeks and months. People working in essential services, public and private, may well see their workloads increase and receive higher reward for additional hours if not bigger pay awards. But at least as many private sector or charitable sector organisations will be badly affected by the Covid-19 lockdown. These will be making immediate pay cuts (including those who participate in the Government’s Job Retention Scheme but don't top up the 80% wage subsidy on offer), introducing pay freezes and/or cutting hours. Unemployment will also be rising as some businesses cut jobs which will depress wage pressure in the economy overall.

Millions of employees will feel the pinch which will slow average weekly earnings growth considerably. Without the Living Wage/Minimum Wage increases we would probably be looking at growth in regular average weekly earnings slowing from around 3% to around 1.5% in a matter of a few months and then slowing further the longer the crisis lasts. If so, real wage growth will fall close to if not below zero (depending on what happens to price inflation). This is bad news because we’ve only recently seen the average real weekly wage rise above the pre-Great Recession level.  

In view of this tomorrow’s Living Wage hike might be seen as a good move, offsetting the depressing economic effect of Covid-19 by putting more money in the pockets of the working poor. However, the Living Wage/Minimum wage increase is likely to prove only a partial palliative. A lot of recipients of the hike will be employed in exactly the kinds of sectors hardest hit by the crisis and employers may well respond by making even bigger cuts in hours or jobs than would otherwise be the case.

The overall effect on nominal average weekly earnings growth is difficult to judge since we don't yet know how businesses will respond. Optimists can point to well researched evidence of the benign effect of the minimum wage over the past 20 years, though whether this is guide to what might happen now is questionable.  

What one can say is that in current circumstances the faster the rate of growth of nominal average weekly earnings the smaller the squeeze on real wage growth and the greater the risk of a bigger than necessary rise in unemployment.

While a rise in the Living Wage/Minimum wage is highly desirable in normal times these are very far from normal times and a 6+% wage rise looks like Alice in Wonderland economics. Lewis Carroll himself might marvel at the Government hiking the pay of employees it was at the same time subsidising to keep in work.

There is of course nothing to stop ministers from exhorting employers who are able to afford it to voluntarily match the planned increase, perhaps targeting the supermarkets who might make a goodwill gesture to hardworking staff at this time. But it would be advisable to either limit the statutory increase or, and preferably, postpone it, with maybe October 1^st rather than April Fools Day a better choice.