Minimum wage hike will harm job growth and competitiveness

Nearly one million Britons will see their pay rise to £5.93 this week, from £5.80 per hour last week – representing a 2% rise in the adult minimum wage in accordance with recommendations made by the Low Pay Commission. As part of the annual update, the government reduced the age at which a worker must be paid the adult minimum from 22 to 21, a change that is estimated to affect 50,000 young Britons. There were corresponding rises in the rate for the two youth wage floors as well, with 18-20 year olds now unable to earn less than £4.92 per hour, an increase from £4.83; 16-17 year old’s wages must not fall below £3.64, instead of the previous £3.57. 

Furthermore, for the first time businesses must pay apprentices, who will be forbidden to work for less than £2.50 per hour. The change was lauded by the Trades Union Congress as a boon for workers, and employment relations minister Edward Davey argued that the changes would “strike a balance between helping the lowest paid whilst at the same time not jeopardizing their employment.”

The generally positive reaction to the minimum wage hike throughout the media and Westminster Village is mistaken, given the deleterious consequences. Far from having positive effects for Britain’s poorest, the implementation of minimum wage in the United Kingdom has generally had a negative effect on their employment. Economic theory suggests that minimum wages that exceed the market wage will create unemployment, as the wages of affected workers will rise beyond the value these workers are able to produce for their employers. Faced with rising losses, employers have no choice but to reduce hours or lay workers off. This unfortunate effect of the minimum wage is further suggested by confirmatory data. In the United Kingdom, Machin, Manning and Rahman (2003) found that the imposition of the National Minimum Wage in 1999 had disemployment effects, and Stewart and Swaffield (2006) found that the weekly hours that an affected worker was employed declined by between one and two hours over the long term.

The disemployment effects of the minimum wage are particularly problematic for workers during times of recession: while workers would normally be able to compete for work by lowering the cost of their labour, thereby stimulating employment and growth, the minimum wage prohibits this competition beyond a certain point and retards the growth of employment. Moreover, this year’s changes in the age threshold for coverage under the adult minimum wage will only increase younger workers’ exposure to these disemployment effects, at a time when youth unemployment remains a problem throughout the United Kingdom. The institution of a minimum wage for apprentices will reduce businesses’ ability to take on such workers, who learn valuable skills through such experiences that increase their employability and earning potential.

The British minimum wage has consistently had a negative effect on British job growth and competitiveness. This year’s changes in the age qualifications for the adult minimum wage, and the new minimum wage for apprentices, are likely to further depress employment prospects for young people. Unfortunately, economic reality does not reflect the sunny outlook of the TUC, and workers will not benefit from this year’s minimum wage hike.

The new rules on apprenticeships appear to be particularly ill thought out and counterproductive – and they provide further evidence that the coalition is actively increasing regulation rather than deregulating.

If you make everyone work as volunteers, or in return for their benefits, that would create any number of jobs, wouldn’t it?

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