According to the IFS, employers could respond to a rising cost of labour by switching to machines—but it’s not guaranteedby Agnes Norris Keiller / January 9, 2018 / Leave a comment
The minimum wage is rising rapidly. In 2015 4 per cent of employees aged 25 and over were on the legal minimum hourly wage of £6.70. Since then, George Osborne’s “national living wage” (NLW) policy has raised the wage floor to £7.50 and it is planned to reach 60 per cent of median wages in 2020 (£8.56 under current forecasts of wage growth).
Because these increases have been, and will continue to be, much greater than for wages in general, the fraction of employees aged 25+ subject to the minimum looks set to treble in just five years, reaching 12 per cent in 2020.
There is a case for a higher minimum wage to help low-wage people—especially since evidence up to 2015 suggests we hadn’t reached the point where a higher minimum starts affecting the employment prospects of those it’s designed to help. But clearly if we raised the minimum indefinitely we would eventually reach such a point: firms appear to be able to adjust to a minimum of £7 per hour without shedding jobs, but no one supposes the same would be true at £100 per hour.
The challenge is that we don’t know at what point inbetween the negative impacts on jobs (and/or hours of work) would become larger than we’re willing to tolerate. So as we push the minimum up into uncharted territory we need to do so in a careful manner that allows us to respond to new evidence on its effects.
New IFS research uncovers another reason why previous evidence on the employment effects of the minimum wage is of limited value when looking to the future: the jobs affected by a higher minimum are quite different from those affected by it before. Many of the very lowest paid jobs are personal service and care jobs. The slightly higher-paid roles that will now be brought within the minimum wage net include a lot more retail cashiers and receptionists, to give two examples. The latter jobs are more easily automated than the former. As a result, in many cases it would now be easier than it was before for firms to respond to a rising cost of labour by switching to machines.