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Some questions for Matthew Hancock MP on the minimum wage

    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:

    1. Why do you think the national minimum wage has not led, as your speech suggested, to less employment than otherwise would be the case? What’s the mechanism?
    2. Does not the rise of unpaid internships suggest there might be plenty of jobs which employees and employers would mutually agree on between £0 and £6.19?
    3. Do you agree that whilst the aggregate impact might not be great, the particularly low-skilled and the young are likely to be the groups who will suffer most, in employment terms, from raising the national minimum wage further? Is no pay rather than low pay a price worth paying for these groups?
    4. If minimum wages increase productivity, as you imply, why do you believe firms are so irrational that they wouldn’t be paying higher wages already?
    5. What do you think is the level at which the national minimum wage will bite?
    6. What is the rationale behind a “national” minimum wage? Do you believe that the minimum wage creates no distortions at a regional level?  Why is the wage of low skilled workers being set by a commission in Whitehall any different, in principle and theory, to the distortions created by national pay bargaining in the public sector, which this Government floated abolishing?

    Ryan joined the Centre for Policy Studies in January 2011, having previously worked for a year at the economic consultancy firm Frontier Economics.

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    Comments

    Anonymous - About 2686 days ago

    "Is no pay rather than low pay a price worth paying for these groups?"

    That rather depends. Since many London rents far exceed the capabilities of people even on the minimum wage, we are spending billions on Housing Benefit (more properly, Landlord Benefit). Given the other costs of even the most basic existence, we are also pumping billions into Tax Credits - funded through the tax system and thus effectively a massive subsidy from firms that do pay over minimum to those who scrape it.

    How anyone (apart from trustafarians in 'think' tanks) is supposed to survive on no pay is not quite explained.

    'No pay' is corporate socialism with the state picking up the pieces.

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    niav nobody - About 2686 days ago

    You missed the point. Which is that some pay is better than no pay at all.

    The minimum wage simply does nothing for those making 0 pounds an hour.

    It's better (for them, to begin with) to have them earn anything over 0. Just getting them into a job would be a major accomplishment.

    As opposed to simply paying the welfare bill and stranding these people with a workless, hopeless life.

    John P - About 2685 days ago

    I admit that I deliberately treated it as a zero sum game but only to heighten the point that the benefits system as it is currently configured hardly benefits those who are claimed to be its beneficiaries and that in the longer term (actually, the medium term) it is unsupportable.

    What we have is crony capitalism obscured by a Heath-Robinson edifice of benefits, tax credits, tax offsets, allowances and God only knows what.

    Proper capitalism is the way forward, with wages reflecting not only the necessary profit for the company but also an empowered workforce's needs. The idea that someone can spend all week working and still have to claim benefits even to survive is ludicrous. The company is receiving a subsidy from the state (though this is obscured by the fact that the money goes to the worker) in which case it is quite fair to ask whether what they are doing is strategically vital but inherently unprofitable and therefore needs to be subsidised. Any other firm should consider its options.

    Of course there can't be some sort of "shock to the system" though it would be an interesting moment if thousands of office cleaners suddenly decided they'd be better of at the other end of the country...