Public choice theorist William Niskanen had much to say on the growth of government bureaucracies and bodies. Whilst recognising that they ultimately depend on politicians for their budgets, they would (he argued) seek to maximise their own benefit within a budget settlement. Thus, they would advise on the need for new functions, and ultimately money to be able to deal with them.
Today, one such body, the Low Pay Commission (LPC), has been given a helping hand in its case for expansion following a report by the Resolution Foundation. The LPC is currently responsible for advising the government on the level of the UK’s national minimum wage (NMW). But the Resolution Foundation authors have much loftier ambitions for the Commission, including a much broader remit ‘to monitor overall low pay, assess its causes, consequences or costs, or advise policy on how to tackle it’. Admittedly this is one of a number of options set out by the Foundation, but each option is designed to ‘strengthen’ the NMW – which in reality means increase it and/or widen the scope of the LPC’s activities.
The classical-liberal case against minimum wage laws on the grounds of free bargaining and agreement, as made by Epstein, is now largely absent from contemporary debate. Instead, discussion is now really about the economic consequences of the NMW and proposed increases in its level. The consensus view is that the LPC has set the NMW such that aggregate employment has not been particularly adversely affected, though certain groups inevitably see reduced opportunities (particularly the young and very unskilled) as one might expect. But economists also agree that the level still matters for the extent of dis-employment (or more accurately, labour hours effects). That’s why in the past couple of weeks we’ve seen the Treasury estimate that unemployment would increase by 14,000 if the NMW was increased to £7 by 2015/16 and the Congressional Budget Office in the US estimate that President Obama’s proposed federal minimum wage increase would increase unemployment by 500,000.
When the NMW was introduced, the justification was to eradicate extremely low pay. By definition, this cannot legally occur any more (though anecdotally this still happens in the black-market economy). But the Resolution Foundation now thinks that the LPC’s remit should be expanded, because lots of people earn around the minimum wage. The LPC needs more powers, they suggest, because for many the floor looks more like a ceiling. Many employers face ‘little pressure’ to go beyond their legal obligation. The idea that a low wage in a particular sector might be indicative of being able to use unskilled labour in that sector easily or else substitute it easily for more productive labour or capital is ignored, as is the role played by tax credits.
Rather than placing large emphasis on economic outcomes such as employment as within the current framework, the Foundation instead says that low pay (defined as two-thirds of median income) could be the variable that the LPC focuses on. This relative definition of ‘low’, in essence, would institutionalise the LPC as a body to reduce inequality rather than to provide a low acceptable floor. It is an inherently ideological commitment to equality imposed through asking employers to internalise the costs of this social aim.
This starting point though leads to three broad options for action, outlined by Sir George Bain in the FT:
- for the government to set an explicit ambition to reduce the share of workers who are low-paid and to broaden the LPC’s remit so it could monitor progress and advise on policies to achieve it;
- to set a medium-term target for the level of the minimum wage, giving business time to adapt to a higher rate;
- having the LPC recommend a higher wage floor, probably non-mandatory, for sectors that can afford to pay more such as finance and parts of manufacturing, or a higher rate for certain regions, starting with London
The first two would represent a significant change in the institution’s remit, as outlined, but most importantly would reduce the focus away from the economic impacts, particularly on employment and the ability of businesses to pay. Their focus suggests that the NMW is an effective way of reducing poverty (which is not the same as low pay), though the IFS helpfully reminds us that 44 per cent of all UK ‘low-paid’ workers are in families in the top half of the income distribution; 12 per cent are in the top fifth of the distribution.
Whilst regionalisation of the NMW would be an improvement on the current NMW, it’s likely that what the Resolution Foundation have in mind is actually increasing it in certain areas – bringing all the same debates about levels which dominate the literature. Meanwhile, applying sectorial ‘recommended rates’ for different industries would either be trivial or wrong. Trivial, if there were no sanctions whatsoever and sectors which would be heavily affected simply ignored it. Or wrong, if the LPC was given powers of enforcement, with a large bureaucracy attempting to define sectors which change dynamically. Would a cleaning service contracted to a bank face the sectorial minimum wage of domestic services or finance? All of a sudden it looks like a throwback to 1970s incomes policies.
Many supporters of a free-market oppose the NMW on principle. Despite some of the inevitable negative consequences of the NMW existence, the LPC has though at least taken the threat to employment seriously in setting the level. The options outlined in the Resolution Foundation’s paper would, however, water down this commitment, focusing instead on inequality and the LPC having more power over a much larger range of wage setting. Divorcing much more wage setting from any notion of productivity and instead handing responsibility over to central planners is akin to the same mistake that’s been made through history with rent controls. Beware of lofty sounding intentions. And mission creep.