Thursday, October 12, 2017

Living Wage helps hundreds of thousands of low-paid workers

A think tank, the Resolution Foundation, has published a report suggesting that the National Living Wage introduced by George Osborne when he was chancellor has lifted 300,000 British workers out of their measure of low pay, defined as less than two-thirds the median hourly wage. The share of workers on low pay as so defined has fallen below 20% for the first time since the 1980s.

The Resolution Foundation, added that this is the biggest year-on-year fall in low pay since 1977 - with its report claiming the national living wage has not been the "jobs-killing disaster" some feared.

Many people - including myself - would once have shared that fear, but it difficult to dispute the Resolution Foundation's conclusion on this point given that the number of people in work in Britain is at an all time high and unemployment rates are at a 42-year low.

A Government spokesman commented that

"The national living wage has delivered the fastest pay rise for the lowest earners in 20 years and they will continue to see their pay go up, with the rate set to increase to 60% of median earnings by 2020.

"But we want to go further by creating good quality jobs for all through our modern Industrial Strategy, boosting earning power and improving living standards across the country."

I would once have been strongly opposed to this policy and it is worth explaining why I have changed my mind.

In a pure free-market economy, which does not exist anywhere and never has, introducing a legal floor to wages at above the rate currently paid to the lowest-paid workers would inevitably create unemployment by increasing the number of hours people want to work while reducing the number of hours of employment which it is profitable for employers to offer.

I have never discussed the issue with a reasonably good knowledge of business and economics who does not think that in the real world too, if you increase such a wage floor above a certain level, it will begin to destroy jobs.

However, the interesting thing is that both when Labour introduced the original minimum wage under Tony Blair, and when the Conservatives increased it with the National Living Wage (NLW) under Cameron and Osborne, this did not happen.

As I wrote above, the introduction of the National Living Wage has proved perfectly compatible with the highest levels of employment ever recorded in Britain.

Two observations about why this may have been possible.

We're not living in a perfect free market, in particular Britain has a welfare state which pays unemployment benefit and other forms of financial support to people who do not have a job. By introducing the Minimum wage and then the NLW, governments have restored some of the incentive to work which the existence of the welfare state has reduced.

It is entirely plausible, both in theory and in practice, that in an economy like modern Britain with a welfare state, a moderate wage floor can have a positive impact on employment by restoring the incentives of low-paid workers to find employment which exceeds the negative impact of reducing the number of jobs.

That it what I believe that NLW has so far done.

However, there is a limit to this. Any wage floor whether it take the form of the old Minimum Wage or a system like the NLW must be set by people who have taken into account the impact on employers.

If there were to be a competitive auction between the political parties in an election to see who could promise the highest wages, there would be a serious danger that it could end up being set at a level which really did destroy thousands if not millions of jobs.

Effectively the people who predicted that the NLW would destroy jobs were crying "wolf" this time: the policy has helped people out of poverty without preventing record employment and therefore has to be judged a success at present levels.

The thing is, there really is a wolf.

There would come a level for the NLW at which the people who are crying 'wolf' would be right. The challenge is to ensure that it is set at a level which is high enough to give Britain the pay rise which so many people need and deserve, but not high enough to kill significant numbers of jobs.

1 comment:

Jim said...

"However, the interesting thing is that both when Labour introduced the original minimum wage under Tony Blair, and when the Conservatives increased it with the National Living Wage (NLW) under Cameron and Osborne, this did not happen."

Its always hard to see the "Unseen", and whilst i can relate to this post and the stats dont show massive amounts of job losses, I think there has been a bit of a delayed reaction. OK people did not lose their job in tesco for example, but when they left or retired they were replaced by a self scan unit.

Not so long ago it was pretty rare to see a checkout that was closed, now you never see more than half of them open, and of course the self scan machines are more and more popular. Why pay 12 checkout operators to open 12 checkouts when you can pay 2 to "look after" 12 self scanners?

Even McDonald's orders are taken by a self selection machine.

I think what we are seeing is a "higher skilled" economy, The min wage jobs (ie those jobs whos return to the employer is lower than the cost of the labour) have been automated, some who do remain have been given extra duties. I'm not making a point that automation is bad, Just really trying to understand myself why we have seen that which we have.