Increasing minimum wage a big risk, says the Institute for Fiscal Studies. But so is leaving your house in the morning

The think tank has opened up an economic debate, warning that jobs might be at risk at some point. But there is a moral case for increasing what the people on low pay earn too

James Moore
Chief Business Commentator
Thursday 11 May 2017 16:10 BST
Both the two biggest parties plan to increase the money paid to minimum wage workers
Both the two biggest parties plan to increase the money paid to minimum wage workers (Getty)

When the Blair Government first started talking about a minimum wage, the restaurant trade had to consider kitting waiting staff out with ear plugs, so loud was the wailing and gnashing of teeth from well paid economists, business lobbyists and executives when they were out for lunch.

Britain was just about the only big country that didn’t have one, and that included the US, the home of capitalism red in tooth and claw.

But, critics warned, it’ll cost jobs. Loads of them. Even with the wage set at a level that was hardly generous, there were studies knocking around claiming that hundreds of thousands of people would be thrown on to the dole as a result of its introduction.

If companies couldn’t get away with poverty pay, the critics said, they’d end up shutting up shop. And what about the CEO’s new car?

The country has moved a considerable way since then, but it sometimes feels as if the debate hasn’t.

Take the Institute for Fiscal Studies. “Minimum wage increase could cost jobs,” the headlines screamed, after the respected think tank took a look at the plans put forward by both the Labour and the Conservative parties.

Actually what it has to say is a little more nuanced than that, and than how many commentators (particularly on the right) will portray it.

So let’s take a look. Both parties have moved away from the current arrangements, which see the Low Pay Commission recommending what it considers to be an appropriate level for the payment.

Instead they’ve taken a conscious decision to increase it (on the Conservative side that is in part to save the state from having to subsidise low pay via tax credits).

The IFS says that, for those aged 25 and over, Conservative plans would result in the minimum wage hitting £8.75 per hour by 2020. That is 5 per cent higher than if it increased from its current level in line with average earnings.

Under the more ambitious Labour plans, it would stand at £10 per hour in 2020, which is 20 per cent higher than under average earnings indexation.

The IFS says that just 4 per cent of employees aged 25 and older were paid the National Minimum Wage in 2015. The Conservatives’ ‘National Living Wage’ currently covers 8 per cent of those employees. It expects that to increase to 12 per cent by 2020, but to 22 per cent in 2020 under Labour’s plans (which would bring the wage up to a level similar to that seen in France).

Now, the IFS accepts that the tired old argument that minimum wages cost jobs, has proven to be false.

But there will, it warns, come a point where increasing it will do that. It’s just that nobody knows where that is.

Both parties’ current plans represent a risk, it says. But, so what. Leaving the house is a risk.

The benefits from compensating people properly for the work they do, I’d say that they outweigh those risks. There is a moral case for the minimum wage that economic debates like this one often ignore.

But, says the IFS, minimum wages aren’t cost free. Someone has to pay for them. That is true. They do increase employers’ costs. Someone has to pay for that; consumers, shareholders, or people on higher wages. Or (more likely) a combination. So be it. They can afford it.

And the cost could, anyway, be mitigated by productivity gains. A lot of big employers, for example, support the higher, but voluntary, Living Wage, set by the Living Wage Foundation. They say they get better work as a result, keep staff for longer, and enjoy lower rates of absenteeism.

“Ultimately, the most difficult thing about the setting of minimum wage policy is that we do not know the point at which the minimum wage significantly hits employment,” the IFS warns. “But this should lead to a very simple conclusion: politicians should be particularly careful when setting its level.”

Right. Asking politicians to be careful. British politicians went ahead with an EU referendum, the leavers among them had no plan for Brexit if they won that (as they did), but now they’re pressing ahead with the hardest, most damaging option, at the risk of tipping the economy off a cliff.

The IFS is in cloud cuckoo land if it thinks that lot are ever going to be careful.

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