Outlook: Maximising benefits of minimum wage

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The Independent Online
Most reasonable people can accept that there is a good case to be made for the introduction of a national minimum wage. The arguments, as the Commons demonstrated yesterday when the Government's Bill had its first reading, concern the specifics. One issue is the level. Is the low pay commission going to recommend something closer to the unions' bizarre target of half median male earnings of above pounds 4? Or to the employers' pitch for something less than pounds 3.50?

The answer matters because the impact of a minimum wage on jobs depends very precisely on how its level compares to how much employees are worth to their employers. Sometimes the introduction of a minimum in low-paid areas can actually increase employment by improving the incentive for people to take jobs. This is precisely what the Chancellor wants it to achieve.

Too high a level, on the other hand, will cost some low-paid workers their jobs. If their pay reflects their productivity, a higher minimum wage will price them out of work. This problem is most likely to arise with young and inexperienced employees whose productivity is genuinely low. The evidence from economic research in several countries is clear: too high a minimum for people in their late teens and early twenties can dramatically raise youth unemployment.

This is why some members of the Government and low pay commission are in favour of an exemption for young people. Apart from anything else, it would make the welfare-to-work programme for young people more expensive and less effective if they had to be paid too high minimum wage.

The economics dimensions of the choice are clear. Either there has to be a youth exemption to the national minimum or the level must be set low enough not to price young people out of work. The former looks unfair and is politically unattractive. The latter makes the policy less effective for the rest of the workforce.

A likely compromise is to link an exemption for the under-26s to the provision of training, which would make it clear why they did not yet qualify for the minimum. The trouble with this is that it is much harder to police - any canny employer would set up a training programme that satisfied the letter of the law, and the potential for disputes would be enormous.

So the hard choice facing the Government is economic and administrative common sense versus political practicalities. But so important is it to Gordon Brown to demonstrate that he is getting more people into jobs that he is unlikely to opt for a version of the minimum wage that risked putting young people out of work. The economists will win this one.