Wanted: chef at pounds 50 a week less than going rate: A year after the statutory floor under pay was abolished, minimum wages remain a political hot potato. Robert Chote reports

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The Independent Online
EARLY this summer a hotel advertised in its local JobCentre for a qualified second commis chef prepared to work a 38-hour week for pounds 60 - a job for which it would have been illegal a year ago to pay less than pounds 110. Is this a triumph for labour market flexibility or a licence to exploit the low-paid?

It is a year since the Government abolished the Wages Councils, which put a statutory floor under pay rates for 2.5 million of Britain's lowest-earning employees. But minimum wages remain a political hot potato.

The Liberal Democrats' employment policy group is split on whether to reverse the party's previous opposition to a minimum wage. Labour backs a minimum wage, but the leadership will be pressed at this year's party conference to announce at what level it would be set. And the Government has yet to decide whether to abolish Britain's last remaining minimum wage legislation - for farmworkers - in a move that would be opposed by employers and employees in the industry.

Economists have failed to reach agreement. Free-marketeers argue that minimum wages 'price workers out of jobs'. If you forbid shoppers to buy apples for less than 20p a pound above their current price, common sense and economic theory tell you they will buy fewer.

Similarly, the argument goes, if you prevent employers paying workers less than pounds 3 an hour, they will employ fewer people than if they could set wage rates at whatever level the market would bear.

This view was backed by the influential Organisation for Economic Co-operation and Development in a report on employment policy in June. Its conclusion was seized upon by the Government as backing for its aim of promoting labour market flexibility.

The Government has been reluctant to accept the logical conclusion of its own policy. David Hunt, the former Secretary of State for Employment, said he backed the abolition of the Wages Councils, but did not expect wage rates to fall as a result. However, today's survey by the Low Pay network found wage levels have dropped significantly in former Wages Council industries.

Evidence that minimum wages destroy jobs is hard to come by. During the 1980s the minimum wage rates set by the Wages Councils fell relative to the national average wage. A recent study by Richard Dickens and colleagues from the London School of Economics found this had harmed employment in the relevant sectors, which suggests that minimum wages may even create jobs rather than destroy them.

The LSE study argues that many employers systematically pay employees less than their work is worth. They know that even if a competitor offered to poach employees and pay them their full worth, it would be costly, time- consuming and disruptive for them to change jobs.

So if a Wages Council were to push wage rates higher, some of this slack would be used up, but it would still be worth the employer keeping the workers on. More people would also be attracted to apply for the jobs, and it would still be profitable to take them on.

This study suggests that the level of the minimum wage is crucial. Too low and it will be ineffective. Too high and it will destroy jobs. In between, jobs may even be created. More by luck than judgement, the Wages Council may have got it about right.

(Photograph omitted)