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Why a £10 minimum wage makes sense

Scare stories about minimum wages decimating jobs are mostly just that - scare stories to protect profits. Actual data tells a very different story to received economic wisdom.

Samir Jeraj John Hare
24 September 2014
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Flickr/jez s. Some rights reserved.

On the September 4th Green Party Leader Natalie Bennett announced that her party would campaign for a £10 minimum wage at the next election. It’s a radical policy compared to Ed Miliband’s £8; if the Minimum Wage keeps pace with inflation, and if inflation averages 3%, then Labour’s offer is barely more than an inflation plus 1% extra per year until 2020. The Green Party’s proposal is significantly, eye-catchingly, higher - but is it a sensible or defendible policy?

Or will they?

As so often, real-life economic data does not support a common sense point of view. There are a few real life test cases that illustrate the point.

Firstly, the EU. There is a huge range of minimum wages within the EU – the Belgian minimum is nearly three times as much as the Portuguese. There is also free movement of labour within the EU which means that common sense tells us that jobs should start migrating from Belgium to Portugal. In fact we see the opposite – the three lowest minimum-wage economies in the EU, Spain, Greece and Portugal have dramatically higher unemployment than those with the highest minimums, more than four times as high if we compare Greece to the Low Countries. Conversely, two of the highest minimum wage economies—Belgium and The Netherlands—have two of the lowest unemployment rates in the EU, despite the fact that we know many workers are migrating into those economies from the low-waged south of the continent. There are of course counter-factuals – Ireland for example has a high minimum and high unemployment, but the  common sense correlation between high minimum wages and higher unemployment simply can't be found; in fact it is generally the other way around.

It has been argued that the EU doesn't have a genuine internal labour market due to barriers to labour movement such as language and no tradition of cross-country mobility, so “proper” market forces are not operating there. The USA has no such obstacles; it has a highly mobile labour market with a high tradition of moving for work, it also has no language barrier. In 2010 Arindrajit Dube, T. William Lester, and Michael Reich, analysed every matched pair of counties which bordered each other but one was in a state with a high minimum wage, the other not. So these are literally adjoining counties, one with higher wages than the other. They found no effect on unemployment whatsoever. The huge scale and thoroughness of this study, combined with the absence of confounders makes it a powerful piece of evidence that there isn't a simple, causative supply-demand curve relationship that means higher wages at the bottom lead to higher unemployment.

Moreover when Dube et al compared low-minimum wage US states with high-minimum wage states in terms of employment growth between 1991 and 2006, they found an almost perfect match between the two; in other words both wage-regimes grew or lost jobs at almost exactly the same rate. To get such a good correlation over this kind of time period is very powerful evidence that it is not minimum wage levels that determine new job growth.

Another real-life case study is the introduction of the National Minimum Wage in the UK which increased low-end wages for several million workers overnight. When the Labour Party included a Minimum Wage in its 1997 manifesto, the Economist opined “coming up with a Minimum Wage that will not seriously harm the economy and destroy jobs will require the wisdom of Solomon or extraordinary luck”, while the CBI chimed in that “even a low minimum wage would destroy job opportunities”. The Conservative Party opposed the policy and (after losing the election) announced that it would repeal the Minimum Wage when it returned to power. All three institutions have now reversed their position and support the Minimum Wage. Why? Because detailed academic studies of the effects of the National Minimum Wage in the UK have all shown that it did not lead to higher unemployment and caused just a small (less than 1%) one-year blip in inflation.

Moreover, all of the arguments cited above examine just the basic relationship between bottom-end wages and unemployment, none factor in the huge boost to growth and employment that would be triggered by the increase in spending and demand that would result from a significant increase in wages.

So, what would the effect of a £10 minimum wage be? The short answer must be, we don't know. There could be an employment effect, there would certainly be some inflation effect. What we do know is that so far there has never been a significant negative effect from the UK minimum wage and this means that there must be 'headroom' for it to be raised - how much headroom we don't know. For an economist, there is certainly nothing wrong with setting a £10 minimum and then cutting it if there's good evidence that it's economically damaging, although this may be a harder sell for politicians who are often judged on their degree of policy certainty, and punished for U turning.

Many of those who are eager to dismiss the £10 Minimum as fantasticical accept the moral argument for the Living Wage – and it is surely scandalous to have a Minimum Wage that isn't a Living Wage, it is state-sanctioned poverty for those working full time. But they should remember that the Living Wage is only a Living Wage if the person receiving it is in full receipt of all in-work benefits, from tax credits to housing benefit. If these state subsidies to low pay employers were removed, the actual Living Wage would be over £10, in other words, the Green Party's £10 Minimum is far closer to 'real' cost of the Living Wage than any of the other figures out there, it's just that at present low-pay employers are able to shuffle off a significant amount of that cost onto the tax-payer.

The social costs of low pay are legion; worse education results, higher youth crime, sluggish growth, more relationship break-ups among couples with children to name just a few. Most of those costs are absorbed by the state and by ordinary citizens. Perhaps it is time we started discussing whether those who benefit from them—employers—started to shoulder their fair share of the costs?

 

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