4 November 2019

There’s more to low pay than just the minimum wage


The governmental art of calling for an independent study is making sure you’ll get the answer you want before it begins.

Much of that depends, of course, on appointing the right person to carry out the research. The ‘independence’ part is just one of those little jokes played upon us.

So it is that the independent commission upon minimum wages, set up by Phillip Hammond, has just come back with the conclusions on minimum wages that Phillip Hammond was after. Funny that, eh?

This is not, by any means, to criticise Arindrajit Dube who conducted the study. He’s a careful and honest researcher. It’s rather that his views are well known – higher minimum wages, to a point, are good things with few bad effects, which probably explains why he was chosen in the first place.

The political background here is simple enough. It’s currently fashionable to refer to wages below 66% of the median as “low wages”. By this logic, if the minimum wage is raised to 66% of the median wage, the government has magically abolished low pay. As both Hammond and his successor Sajid Javid have indicated that 66% will be around £10.50 an hour by 2024, that’s what the minimum wage is going to be.  And who wouldn’t want to be the Tory Chancellor who abolished “low” wages?

There are certain problems with this idea, of course. For a start, some people will be priced out of a job by the higher minimum wage. Just as problematic is that those with no incomes at all are not counted as being low waged.

The big question then becomes how many people will be unwaged as a result of this battle against low wages?

The usual rule of thumb is that substantial numbers start to appear when the minimum rises above around 50% of the median hourly wage. Professor Dube is more optimistic; recent research of his shows – to his satisfaction at least – that setting the minimum wage at 58% of median presents no notable problems. That is still short of the 66% being aimed for here, of course.

But there’s another problem here too. Professor Dube’s 58% figure is of the median hourly wage for all jobs. Given that part-time workers generally get paid less than full-timers, the median is lower than it would be if we only counted full time workers. Yet the Government’s new £10.50 target is 66% of the full-time only median wage. That seems to be something of a skip and a jump over a major technical detail. Before this report the evidence suggests that a UK minimum wage of perhaps £7.50 an hour (at today’s, not 2024’s, average wage) does not cause significant numbers to become unwaged.

All of this though is to miss two other important points. The first is that here the talk is about the effect upon those who currently have jobs. What isn’t being considered is jobs which are never created as a result of the price of labour. For there will, obviously enough, be some of those missing in that high wage future.

The focus on cash and cash alone is also highly problematic. People do not go to work exclusively because of wages, important though they are. Things such as working conditions and perks make up our total compensation. And from the employers’ point of view all of these make up the total cost of employing someone. How the different elements of compensation are divided matters less than the total cost. It seems reasonable to assume, therefore, that raising minimum wage is liable to mean businesses spending less money on various non-wage perks.

There is a better way to make people on low wages better off – reduce their tax bill.

About a decade ago the Centre for Policy Studies – publishers of CapX – and the Adam Smith Institute started shouting from the rooftops that the best anti-low wage policy was to raise the personal allowance for income tax. This worked, in that it has more than doubled since then and is now approaching £12,500 a year, which obviously means more pounds in the pockets of lower wages. More recently, the CPS has advocated going further by pushing up the threshold for national insurance – a de facto income tax – so low wage workers could earn £1,000 a month without paying any tax or NI on it.

The £12,500 income tax threshold was not chosen at random. It was the full year, full time, minimum wage back when the policy was calculated and adopted. The justification, of course, was that if this is the righteous minimum that anyone should receive for the sweat of their brow then why should they be taxed upon it?

This, rather than a hike in the minimum wage, is still the correct response to low wages. If you want people on low wages to have more money, try no taxing them so damn much.

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Tim Worstall works for the Continental Telegraph and the Adam Smith Institute