It's a bit late now for second thoughts about the National Living Wage

The new higher minimum wage comes into effect today, and some on the left are expressing doubts

Click to follow
The Independent Online

Rather late in the day, that is, on the day that it comes into effect, some on the left are having second thoughts about the National Living Wage. Today, the national minimum wage for people aged 25 and over rises from £6.70 an hour to £7.20, which is an increase of 7.5 per cent.

When the Chancellor announced it in his post-election Budget Labour, confused at having been leapfrogged, didn't know whether to criticise it for not being the "real" living wage (which is £8.25 an hour outside London, and is set by the Living Wage Foundation), or to point out that the gains would be taken away by the cuts in tax credits (which were postponed in the Autumn Statement and which may never happen, depending on what Stephen Crabb does to universal credit). 

Stephen Bush at the New Statesman has a go at criticising the National Living Wage on both grounds, with a particularly good line: “The new higher wage can only be described as a 'national living wage' if the word 'nation' is redefined to mean 'Wales in 2013'.” But he also draws attention to the broader economic picture, which is the bit that Labour couldn't mention last year because it loves the living wage, even if Ed Miliband was too cautious to propose legislating for it, or for a big step towards it. 

George Wilson at Left Foot Forward also criticises it, but on the rather more trad-left grounds that it substitutes for collective bargaining, which was the conservative trade-union objection to the national minimum wage before it became Labour Party policy, defended by the shadow employment secretary, Tony Blair, in 1989-92.

Wilson moves on from that debate, defending the Low Pay Commission, which set the national minimum wage, as an example of "social partner co-operation" (it includes representatives from trades unions and from business managers). The Commission has now been overridden by the Chancellor's "diktat", in effect putting the minimum wage up in stages to 60 per cent of the median wage by 2020. Like Bush, Wilson points out that this increase is likely to cost jobs. 

The Institute for Fiscal Studies won't want to say it told you so but it told you so. In September 2015 the IFS produced this assessment

While the new NLW will increase hourly pay for some individuals it is highly likely to reduce incomes in other ways. It could lead to a reduction in employment. Indeed the OBR assumes that it will increase the unemployment rate by 0.2 percentage points (equivalent to 60,000 individuals) and reduce the average hours worked by those in work by 0.2%. Taken together this reduces total hours worked per week by 4 million. The OBR estimates GDP will be in fact be reduced by 0.1% as a result of the introduction of the new NLW. In other words the OBR is expecting that the new NLW will result in a small overall reduction in living standards (at least in the short run).

It is also important to be clear that even if GDP, employment and hours worked are all left unchanged the increase in gross wages from the new NLW will need to come from someone. Either company profits will fall depressing returns to shareholders, or prices will rise or the earnings of other individuals will be reduced. The only way that overall the new NLW could pay for itself is if it directly boosted productivity – possible in the longer run, though unlikely to be sufficient to pay for the higher wages in full.

In other words, the National Living Wage will put 60,000 people out of work who would otherwise have jobs – many more than if the entire steel industry shut down – but George Osborne is hoping that the jobs miracle that has been generating employment since the bottom of the recession will soak that up. 

Furthermore, the National Living Wage will make the country slightly poorer overall, but slightly more equal (except for the 60,000). It is almost like a laboratory-conditions test of social-democratic egalitarianism. How curious that it is being carried out by a Conservative chancellor. 

• Sign up for my Catch-Up Service email, which is sent out at 9am.

Comments