Matthew Hancock MP, Parliamentary Under-Secretary of State for further education, skills and lifelong learning, this morning gave a speech to the Resolution Foundation on low pay. Entitled, ‘A Conservative Agenda for Tackling Low Pay’, the speech was largely based around the idea that there were three mechanisms at the Government’s disposal for ‘dealing’ with the problem of low pay: namely, the minimum wage, cutting income tax for the low paid and taking steps to improve longer-term productivity performance.
At this stage, a fourth strategy (not mentioned by Mr Hancock) came to my mind: stop making things more expensive! Low pay is more of a problem if the cost of things is continuously going up – so why is the Government implementing a unilateral carbon price floor from April which will add to consumer bills? And why is the Government subsidising inefficient forms of energy which will raise costs to consumers? And why is the Government deliberately trying to inflate house prices? And why is the Government not more concerned that the Bank of England has constantly not met its inflation targets on the upside?
Anyway, I digress. The speech rightly acknowledged towards the end that it is productivity improvements which are the only really sustainable way to improve pay levels for earners. And there was some good stuff in there about the role of marginal incentives and setting the right conditions for innovation, alongside the educational improvement arguments, as means through which the Government could try to achieve this. Unsurprisingly, Mr Hancock also highlighted the role taking the low paid out of tax can have in alleviating the pressure of low pay, with the Coalition already committed to raise the personal allowance to £10,000 by next year (though the obvious question then comes: if the national minimum wage isn’t considered generous enough for people to live appropriately on, then why are you taxing people earning between £10,000 and people earning full-time NMW at all?)
The worrying part of the speech as far as I was concerned came towards the start. First, there was an attempt to define freedom as the right to be well paid and have time in the garden. Or something. I’d have thought freedom would have been about the right for employers and employees to decide wage rates outside of the strait-jacket of government dictat. But the more worrying section was the part about ‘strengthening the minimum wage’ to reduce low pay.
Now, Matt brushes off concerns about the national minimum wage leading to more unemployment by saying that studies have shown that it doesn’t. Well, studies are divided on this. Some suggest the overall unemployment effect is negligible, others that the orthodox view holds. Most economists conclude that above a certain level there will be damaging effects on unemployment of raising the minimum wage – increase the price of something too far and you’ll demand less of it!
Evidence that national minimum wages might not reduce employment have usually been presented without much in the way of theoretical explanation to back it up. Three potential explanations have been advanced, but all look implausible: first, if firms hiring these workers with low skills are monopsonists (monopoly buyers of labour) – evidently not true when you look at the sorts of industries which pay the minimum wage. Second, if all of the increase in cost is absorbed as lower profits – which in itself will have consequences of deterring innovative new start-ups, or force firms with thin profit margins out of business (as Chris Dillow has said, if you don’t believe this, you don’t believe in capitalism). Third, if higher minimum wages reduce turnover of staff, or increase productivity and so lead to an overall cost saving – but if this was true, wouldn’t rational firms be doing it already and not require it to be imposed?
Finding robust data to prove one way or the other is incredibly difficult. The Low Pay Commission has said they don’t think it has much effect on employment, but the surveys which accompany their reports from businesses have often suggested otherwise. Do we really think there are zero extra jobs which would be done for below £6.19 for adults if there was no minimum wage, or that increasing the minimum wage for low skilled workers will lead to zero substitution for capital or higher skilled labour? These would be the implications of zero effect.
All of these issues are interesting – and given that Matt Hancock has obviously thought about them, I’d be interested in asking him some questions as to why he thinks increasing the minimum wage is a good idea: