9 May 2019

A higher minimum wage would do more harm than good

By Tom Westgarth

Normally, the idea of a Conservative Chancellor implementing the world’s highest minimum wage would sound like an April-fool’s joke. However, our contemporary political moment is far from typical. Philip Hammond is reported to support an increase in the minimum wage up to 66 per cent of median earnings in an attempt to lift millions of workers out of low pay.

With the British economy facing high levels of inequality and in-work poverty, the Chancellor is right to attempt to address these issues. After all, the Conservatives lack of a clear message on areas such as housing and income disparities has ceded political ground to Jeremy Corbyn’s Labour party. The problem is that this blunt policy proposal will actually worsen many of the structural problems gripping the British economy.

While current data challenges the traditional economic belief that minimum wages would lead to unemployment, it is clear that upping wage floors will have an adverse effect on the type of employment that results. A higher national minimum wage would reduce the amount of training given to staff by employers. Rather than investing in improving the social capital of their workforce, businesses will have to forgo such plans in order to fork out for higher labour costs. The result would be that in the long run workers would remain trapped in lower wage brackets.

This poses a fundamental problem for Hammond. With an economy plighted by low productivity growth, increasing the minimum wage at such an ambitious rate could further harm Britain’s long-term productivity gains. In an economic environment mired with Brexit uncertainty, taking on additional workers is much less costly than increasing capital investment.

Regarding inequality, the chancellor’s analysis is misplaced. The Economist has frequently noted that many of those on the minimum wage are actually secondary earners of middle-class households, meaning that income would be ineffectively redistributed back to those with a healthy household income.

Inequality would actually increase further between generations. A higher national minimum wage would increase labour market competition for minimum wage jobs. With less incentive to seek promotion and find previously paying higher roles, older, more experienced workers would crowd out this market.

This would prove disastrous for young people, who rely on low-paid, flexible work to gain experience and pay their way through tertiary education. A study from the Institute of Labour Economics (IZA) found that young people are harmed by minimum wage increases more than any other social group.

Such a poor understanding of the underlying trends driving modern society is symptomatic of the Conservative Party leadership of late. The cabinet have managed to simultaneously fail to provide a coherent message regarding how it wants to address the injustices Britain faces whilst adopting the watered down economic policies of an opposition that have.

The Labour party do not have a monopoly on the disadvantaged; Conservatives have merely failed to offer a viable alternative. A modern Conservative party must embrace technology in a way that emancipates workers, continue their efforts in tackling climate change, as well as fixing the housing crisis. Ballooning wealth inequality represents a wider milieu of political discontent with the growing gap between the “haves” and “have not’s”. Hammond’s minimum wage hike is an attempt to temper income inequality and low-pay, but his shot is woefully wide of the target here.

One way to tackle inequality and in-work poverty would be to reverse the cuts to tax credits that the Conservatives have implemented in recent years. They aren’t cheap, but shifting the economic burden away from businesses to taxpayers will ease the threat of job losses and reduced human capital investment.

Ultimately, innovative private enterprise encouraged by effective government policy will help to reduce in-work poverty. A government report found that Britain was suffering from a  chronic shortage of capital investment compared with competitor economies, so encouraging the private sector to invest in the UK is crucial. Finland, the EU nation with the lowest level of in-work poverty, provides subsidies to innovative businesses in high-value sectors such as technology and renewable energy. This works because open markets and social justice are not mutually exclusive concepts.

Attempting to outdo John McDonnell on left-wing economic policies is a futile project. It is bad economics and bad politics. Instead, Conservatives must provide fresh ideas that offer people hope. Reducing environmental degradation, mental health waiting times and housing injustice will go a long way to winning current and future generations over — the world’s highest minimum wage will not.

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Tom Westgarth is a Young Voices advocate.