The true cost of a minimum wage

ECONOMIC VIEW; `The TUC's arbitrary level would harm women'
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The Independent Online
Clouds of emotion and ideo-logy obscure the debate about the merits of a minimum wage. This is understandable enough. There is no question that many are being exploited by their employers - the scale goes far beyond Burger King.

There has been, however, little debate about how it would help in practice - and, in particular, who would lose their jobs - if a minimum wage rate was introduced.

A national minimum wage is supposed to help the most exploited workers in our society. The typical low-paid worker is female, often part-time, and concentrated in services rather than manufacturing.

The Trades Union Congress makes much of the fact that two-thirds of those earning less than pounds 2.50 an hour are women, as are almost three-quarters of those earning under pounds 4.

It is is obvious that a higher minimum wage would help these women - if they kept their jobs. But this is a huge caveat in precisely the kinds of work that many low-paid women do.

A child-minder is a good example of the sort of worker that advocates say a minimum wage will benefit.

These women work from home, receive about pounds 2 an hour and have no legal protection. What could be clearer than the strength of their case for relief from poverty and exploitation? A minute's thought shows that legally enforcing a higher hourly rate would be disastrous for them.

Child care is the biggest expense a working parent faces. Paying a child- minder pounds 2 an hour for a full working week costs about pounds 4,000 a year out of the parents' after-tax income. Doubling the rate to pounds 4 an hour - just under the figure the TUC is pushing for - would take child care costs to pounds 8,000.

The second parent to go out to work would need to earn a gross salary of at least pounds 11,000 before she stopped paying for the privilege of entering the labour force. There can be no question that demand for child care would plummet - as would the number of women unable to work outside the home.

This is not a frivolous example. Thousands of women are employed in child care - Britain has more nursery workers than car workers.

The illustration highlights the most important question about a minimum wage, one its advocates rarely address: who will pay? Professor Richard Freeman, a labour market expert at the London School of Economics, raised this question at a seminar held by the Policy Studies Institute earlier this week.

He said: "The people who consume the products or services provided by the low-wage workers will pay. You have got to think about the effect on particular groups of workers."

A minimum wage does not raise pay by magic. It redistributes money. In many cases this will without doubt eliminate jobs if the minimum is set too high. The TUC's arbitrary level of up to pounds 4.15, presented as half the median male wage, would harm women.

It is possible to make some judgements about where an excessive minimum would be harmful. Economic theory suggests that in a fully competitive labour market, a wage set above the market level will cost jobs. But in industries or geographical areas where a firm is the dominant employer - or has what economists call "monopsony power" - introducing a minimum wage above the current level need not cut employment because the firm will be paying workers less than their value to start with.

Estimating where this will apply in real life is a difficult matter, and the empirical evidence on the effect of a minimum wage on jobs is disputed. But there are many cases where employers clearly do not exploit such powers. Services such as child care are one example.

Another is the textiles industry, where many small firms are wide open to overseas competition. The textiles and clothing unions have strong reservations about the effect the TUC's pounds 4.15 would have on women's jobs. Textiles employers would not be able to make customers pay for a higher minimum wage. Their industry is too cut-throat.

These hesitations are supported by an essay in a new volume on the economics of sex discrimination, sponsored by the Equal Opportunities Commission*.

Eithne McLaughlin, a sociologist at Queens' University, Belfast, says a minimum wage should not be set by reference to the historical legacy of male wage rates. Most of the low-paid are not male, and a figure set this way would not take account of their circumstances.

This is not a question of morality. There is nothing fair about the fact that women's pay averages only 70 per cent of men's, or that women are herded into exploitative jobs.

But it is hard to believe that the TUC really wants to further the extreme right-wing agenda of forcing women out of the workforce into the home - which would be the effect of a national minimum wage set arbitrarily at half the typical man's earnings.

* The Economics of Equal Opportunities, ed. Jane Humphries and Jill Rubery, EOC pounds 25.

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