The government—and the opposition—should think carefully before promising themby Jonathan Cribb / May 24, 2017 / Leave a comment
Given all the disagreement between political parties on taxes, spending, benefits and pensions, the minimum wage is one of the unlikely places in which there is some agreement between the Conservatives and Labour. For the first time, both parties’ manifestos are promising increases in the minimum wage that exceed growth in average earnings.
The Conservative plan is the implementation of George Osborne’s “National Living Wage” policy (just a rebranded name for a higher minimum wage), which would see the minimum wage for those aged 25 and over rise from £7.50 now to 60 per cent of median earnings in 2020, forecast to be to £8.75. The Labour plan is more radical. It would implement a minimum wage of £10 per hour in 2020, not only for those aged 25+, but also those aged 18 to 24.
These increases may not sound all that substantial—but they are. Under Conservative plans, the fraction of employees aged 25+ on the minimum wage, which has already risen from 4 per cent in 2015 to 8 per cent now, would reach 12 per cent in 2020. Under Labour it would jump to 22 per cent, more than five times higher than the number of people in 2015. The Labour plans would also mean 60 per cent of 18-24 year olds were paid the minimum wage in 2020.
What effects would a higher minimum wage have? We do not know exactly; the proposed increases are very large compared to rises we have had in the UK over the last 20 years. Furthermore, the minimum wage would be increased to a high level compared to other developed countries. Under Labour’s plans, only France would have a higher minimum wage, but unfortunately there is not robust evidence of the impact of the minimum wage there.
However, we do know that minimum wage increases do not come for free. There really is no such thing as a free lunch. If employers simply pay the higher wages to all their affected employees, this money has to come from somewhere. It can come from lower profits for shareholders (including large numbers of people with pensions invested in listed companies), or higher prices faced by consumers, or pay cuts for other workers. There is a…