The Minimum Wage balancing act
For many years I was vehemently opposed to the idea of a minimum wage. I thought it was likely to create more problems by pricing people out of work than it solved.
I was dead against it when Blair introduced it for very much the reasons explained in an item the Economist blog has published this week on
"why some economists oppose minimum wages."
However, you have to take account of the evidence - as Maynard Keynes said, "When the facts change, I change my mind."
My first fear, that politicians would set it at an irresponsibly high level, has not so far been realised, and the increase and rebranding in the 2015 budget does not appear at first sight to change this. The chancellor set out plans to increase the rebranded "living wage" to £9 by 2020 - which is not very much further than inflation adjustment would probably have taken it anyway.
Nor is there any evidence so far that the minimum wage has priced significant number of people out of jobs.
Nevertheless whether you call it a minimum wage or living wage, the danger of damaging businesses and/or pricing people onto the dole queue if you set it too high or change it too fast is real.
I was interested and concerned by the comments which two of my friends from University who are SME employers posted on Facebook this week. One, a dentist, wrote this:
"The new living wage minimum is a potential disaster for me. I employ seven people and it is only in the last two years that I have not been the lowest earner in the business. If I have to pay my cleaner 9.35 an hour and contribute to her pension by 2020 my other far more skilled staff with far more responsibility and stress will not be happy with 10 an hour. It will have an inflationary effect on my wage bill to the extent that it could make the business unviable."
A second friend from my time at University replied:
"I run two small businesses. I do have some people earning less that the rate proposed in the budget. We are constantly trying to find ways to improve productivity and this will be an additional spur, but it is NOT easy. The rise in pay rate is sort of manageable, but as Celia says, if you were paying someone £7.50 an hour and you have to raise it to £9, then the people who were already on £9 an hour want £10.50 or more. This will drive up inflation I think.
"What I think is GOOD about this budget is that it pushes very strongly to make a financial difference between being in work and being on benefits. I think this is a good thing, not just for the obvious reason that it discourages scrounging, but more importantly I strongly believe that people should be in work as much as possible. The necessity of having a daily focus of your life which is outside of yourself and the need to feel that one has 'done something' each day, raising a sense of self-worth, are also extremely important for people's welfare."
I take the concerns which Celia and Jonathan raise very seriously indeed and I hope the government will watch like a hawk for any signs that the "living wage" is threatening the viability of small businesses and provide more help for SMEs if it does.
But Jonathan's second paragraph summarises perfectly the main reason I have modified my position on the minimum (or living) wage.
The biggest obstacle to people finding work at the moment is NOT wages being too high, and it is NOT a shortage of jobs either, or we wouldn't have lots of people coming here from other countries who, whatever UKIP and the press tell you, are in many cases neither claiming benefits nor depriving British people of jobs, but taking jobs which British people don't want to do.
The biggest obstacle to getting people into work for the past decade has been that
BRITAIN IS NOT REWARDING WORK ENOUGH
relative to what people could get on benefits.
Please note that I am not criticising people who have families to look after and can get more money by staying at home and claiming benefits than by getting a low-paid job for doing what the state is incentivising them to do, or calling them scroungers. The people to blame for the dependency culture are those in authority who were daft enough to let wages and benefits get so far out of line.
The pendulum started to swing back in the last parliament, but it has to swing further, and that is why I have changed my view about the minimum wage.
To provide more incentives I now believe that both these two policies set out in the budget are the right thing to do:
I still think it is essential that the minimum wage is not set high enough to realise the fears of Celia and SME employers like her. I'd like to see the government do more to help them.
But we also have to make sure that people who are working all the hours God sends on unskilled jobs are paid significantly more than they would get on benefits. We have to reward those who do the right thing.
And to get to that position from where we are now means raising wages as well as bearing down on benefits.
Hence the minimum wage balancing act - it must be high enough to make sure we reward work, not so high as to bankrupt small employers and price people back onto the dole queue.
I was dead against it when Blair introduced it for very much the reasons explained in an item the Economist blog has published this week on
"why some economists oppose minimum wages."
However, you have to take account of the evidence - as Maynard Keynes said, "When the facts change, I change my mind."
My first fear, that politicians would set it at an irresponsibly high level, has not so far been realised, and the increase and rebranding in the 2015 budget does not appear at first sight to change this. The chancellor set out plans to increase the rebranded "living wage" to £9 by 2020 - which is not very much further than inflation adjustment would probably have taken it anyway.
Nor is there any evidence so far that the minimum wage has priced significant number of people out of jobs.
Nevertheless whether you call it a minimum wage or living wage, the danger of damaging businesses and/or pricing people onto the dole queue if you set it too high or change it too fast is real.
I was interested and concerned by the comments which two of my friends from University who are SME employers posted on Facebook this week. One, a dentist, wrote this:
"The new living wage minimum is a potential disaster for me. I employ seven people and it is only in the last two years that I have not been the lowest earner in the business. If I have to pay my cleaner 9.35 an hour and contribute to her pension by 2020 my other far more skilled staff with far more responsibility and stress will not be happy with 10 an hour. It will have an inflationary effect on my wage bill to the extent that it could make the business unviable."
A second friend from my time at University replied:
"I run two small businesses. I do have some people earning less that the rate proposed in the budget. We are constantly trying to find ways to improve productivity and this will be an additional spur, but it is NOT easy. The rise in pay rate is sort of manageable, but as Celia says, if you were paying someone £7.50 an hour and you have to raise it to £9, then the people who were already on £9 an hour want £10.50 or more. This will drive up inflation I think.
"What I think is GOOD about this budget is that it pushes very strongly to make a financial difference between being in work and being on benefits. I think this is a good thing, not just for the obvious reason that it discourages scrounging, but more importantly I strongly believe that people should be in work as much as possible. The necessity of having a daily focus of your life which is outside of yourself and the need to feel that one has 'done something' each day, raising a sense of self-worth, are also extremely important for people's welfare."
I take the concerns which Celia and Jonathan raise very seriously indeed and I hope the government will watch like a hawk for any signs that the "living wage" is threatening the viability of small businesses and provide more help for SMEs if it does.
But Jonathan's second paragraph summarises perfectly the main reason I have modified my position on the minimum (or living) wage.
The biggest obstacle to people finding work at the moment is NOT wages being too high, and it is NOT a shortage of jobs either, or we wouldn't have lots of people coming here from other countries who, whatever UKIP and the press tell you, are in many cases neither claiming benefits nor depriving British people of jobs, but taking jobs which British people don't want to do.
The biggest obstacle to getting people into work for the past decade has been that
BRITAIN IS NOT REWARDING WORK ENOUGH
relative to what people could get on benefits.
Please note that I am not criticising people who have families to look after and can get more money by staying at home and claiming benefits than by getting a low-paid job for doing what the state is incentivising them to do, or calling them scroungers. The people to blame for the dependency culture are those in authority who were daft enough to let wages and benefits get so far out of line.
The pendulum started to swing back in the last parliament, but it has to swing further, and that is why I have changed my view about the minimum wage.
To provide more incentives I now believe that both these two policies set out in the budget are the right thing to do:
I still think it is essential that the minimum wage is not set high enough to realise the fears of Celia and SME employers like her. I'd like to see the government do more to help them.
But we also have to make sure that people who are working all the hours God sends on unskilled jobs are paid significantly more than they would get on benefits. We have to reward those who do the right thing.
And to get to that position from where we are now means raising wages as well as bearing down on benefits.
Hence the minimum wage balancing act - it must be high enough to make sure we reward work, not so high as to bankrupt small employers and price people back onto the dole queue.
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