It must have been at least ten years ago now, but I remember watching a BBC compilation of humorous moments from its late-night current affairs programme Question Time. Bloopers and gaffes, as Danny Baker would call them. Studio lights going out, people storming off, accidental innuendos. Anything can happen on live TV! Sticking out like a sore thumb amongst the light-hearted nostalgia was a clip of a Conservative politician—I think it was Michael Howard—explaining that he was against introducing a minimum wage because it would lead to unemployment. The BBC put up a smug caption at the end of the clip saying something along the lines of “unemployment has gone down since the minimum wage was introduced in 1999”.
And so, it did, but Howard (if it was he) was only repeating what economists had told him. The theory is perfectly sound: if employers are forced to pay £15 an hour and your labour is worth less than £15 an hour, you will not be able to find work. Some leftists consider this to be an immoral argument. No one, they say, is worth less than [insert your arbitrary figure here]. But we are not talking about the worth of the person. We are talking about the value that a person can add to the business. Employing people at a loss is a one-way road to bankruptcy, and unemployment will surely be the result.
An understanding that some people’s labour is worth more than others, and that forcing employers to pay above the market rate will freeze them out of the labour market, is implicit in the current system which has lower rates for people aged under 21. It should be self-evident that a minimum wage of £100 an hour would bring the economy to its knees. It is equally obvious that a minimum wage of £5 an hour would make no real difference to anybody. At some point in between, the minimum wage gets so high that it causes significant and visible unemployment. The only question is where. In this paper, Matthew Bowles and Emmanuel Igwe argue that the tipping point has been reached and that it is time for a cooling-off period.
Successive governments have been keen to improve the lot of the lowest paid, not by growing the economy but by forcing employers to pay
them more. “Britain deserves a pay rise”, said George Osborne when he raised the minimum wage and rebranded it as the National Living Wage in 2015. Such generosity with other people’s money led to the minimum wage rising from 46 per cent of the median wage in 1999 to 56 per cent in 2015. It currently stands at 66 per cent, one of the highest ‘bite ratios’ in the world. The negative consequences are becoming difficult to ignore.
Since 2022, the unemployment rate has risen from 3.6 per cent to 4.9 per cent. Most of the increase occurred after 2023 when the economy was growing, albeit modestly. Unemployment is never monocausal, and there are other factors, such as the rise in the employer National Insurance rate, that likely contributed, but it coincided with the standard minimum wage rate rising from £9.50 to £12.71 per hour. The hospitality sector, and pubs in particular, often cite the minimum wage as a leading cause of business closures.
The youth unemployment statistics are even more alarming. Whatever else was going wrong with the British economy, we used to be able to console ourselves that we didn’t suffer from Europe’s seemingly endemic scourge of youth unemployment. That cope is no longer available to us. Youth unemployment in the UK has risen from 9.3 per cent in 2022 to 16.2 per cent today. It is predicted to rise to 17.6 per cent next year. The EU has seen no significant increase in recent years and has a youth unemployment rate of 15.1 per cent. Perhaps the difference is that the UK dropped the age threshold for the National Living Wage in 2021 (from 25 to 23) and then again in 2024 (to 21).
If the analysis of Bowles and Igwe is correct, the BBC gloated too soon. The initial warnings about the minimum wage turned out to be overblown, but only because the bite ratio was set at a reasonable level. Subsequent governments became complacent and pushed the dial too far, harming the very people the minimum wage was supposed to protect. The authors’ recommendation of a five-year freeze may not be popular, but it is eminently sensible.
This is my foreword to a new report from the Prosperity Institute
No comments:
Post a Comment