Unemployment and the minimum wage: the government cannot escape responsibility

This morning the UK government announced that in the last quarter unemployment rose by more than 80,000 to a total of 1.7 million. We should never forget the countless personal tragedies that these figures represent: unemployment not only imposes financial hardship on individuals and families but also causes immense psychological suffering.

 
Today government ministers have been doing the rounds of the TV and radio studios explaining away these figures as an unfortunate by-product of the credit crunch and therefore beyond their control or responsibility. There is some truth in that, but is it really the case that the government bears no responsibility for the increase in unemployment or that there is nothing it can do to improve this situation?

 
To answer that question, we need to look at the minimum wage. The minimum wage was introduced by the UK government in 1999. Prior to its introduction, the IEA published a special edition of its journal Economic Affairs in which economists examined the evidence for and against a minimum wage. Their overall conclusion was clear: in a period of sustained economic growth, a minimum wage has negligible positive or negative effect; but in a period of recession a minimum wage is likely to deepen that recession by preventing labour markets from clearing. Firms will be unable to take on new employees willing to work for relatively low wages in order to escape unemployment; if firms cannot take on new employees and people cannot exit from unemployment, then the route out of recession becomes much slower and more arduous.

 
Sadly, rather than reducing or abolishing the minimum wage, in March this year the government announced that next month it will increase to £5.73 per hour. In the present economic climate this is, frankly, lunacy.

 
The UK unemployment rate is still markedly lower than the continental European norms of around 10%, but there is a real danger that a lasting legacy of the present recession will be increased structural unemployment – that is, unemployment that is long-term and seemingly built into the economy – at continental European levels. The government simply cannot blame this on the global economic climate alone. It is a consequence of the policies introduced when the present Prime Minister was Chancellor of the Exchequer despite the evidence and warnings that the long-term consequence of a minimum wage would be much higher unemployment when the business cycle inevitably entered its downward phase.

 
The government should abolish the minimum wage immediately. If that is politically impossible, then it should be reduced back to its original rate of £3.60 per hour. It would be interesting to see what sort of positive boost such a decision would give to the economy and the financial markets.

Great post. I will read your posts frequently. Added you to the RSS reader.

Lowering the minimum wage may solve the short term problems of u/e, but may not improve the situation in the long term.People would not feel the need to educate themselves at present, because whether one is qualified or not, the low wage would be available to everyone.Lack of education now may mean that the future labour market would have an excess of unskilled labour.

On the contrary, raising wages above the market wage through a minimum wage will, in general, lower the premium that one can get from being better skilled – though we have to admit that a bigger factor here is that a huge proportion of individuals on low income (especially if not single) are facing combined tax and benefit withdrawal rates of 80% plus.

I don’t think a one size fits all minimum wage is helpful. In London £5.73 per hour may be justified but not in a depressed local economy.I think we need to integrate all taxes, benefits and allowances and the minimum wage into one unified tax system otherwise we will never solve the 80% withdrawal rates on tax and benefits.

unemployment will increase in part to the minimum wage as more small firms close not being able to aford the increase.

Could you live on the minimum wage.!
How could you rent or buy a house.
How would you heat your house.
After paying all bills could you buy food.
THE PROBLEM IS BENEFITS THAT TOP UP THESE VERY LOW WAGES,IF NO BENEFITS WERE GIVEN THEN EMPLOYERS WOULD HAVE TO PAY A REAL WAGE.
Minimum Wage is third world rates.

And just to add I was an employer for 15 years,people are getting less now than they were back in 1990.

As economists I am surprised at the lack of supply and demand mentioned here. Living on minimum wage is a fragile existence. It is little more than you get on benefits (housing benefit + jobseekers.) The government have suppressed wages at the lower end of the scale because they have allowed more entrants into the labour market via immigration.If the government reduced the minimum wage to £ 3.60 per hour, £144 for a forty hour week, nobody with a child would be able to pay the rent, bills, council tax, grocery costs, pension contributions. More people would emigrate or leave work and sign on. This theory is about as much use as Anne Frank’s Drum Kit.

If an employer does not want to pay a living wage to do a job, then perhaps he should just get off his backside and do it himself. £5.73 is hardly an exhorbitant sum, and I think any employer that would ask anyone to work for less than a living wage should seriously question whether he is fit to be an employer.

And I meant to say a big thank you to craig – who proves that there are (or at least were) employers out there who do not expect something for nothing.In my own area, when the minimum wage was introduced, it worked against a fair number of people – some of the employers decided to postpone orders, get rid of a lot of their staff, wait a couple of weeks and then advertise the jobs at less than they had originally been paying, NOT to keep their Company alive, but to increase their profit margin. If you exploit people like this you deserve to loose your businesses.

Great post. I will read your posts frequently. Added you to the RSS reader.

Lowering the minimum wage may solve the short term problems of u/e, but may not improve the situation in the long term.People would not feel the need to educate themselves at present, because whether one is qualified or not, the low wage would be available to everyone.Lack of education now may mean that the future labour market would have an excess of unskilled labour.

On the contrary, raising wages above the market wage through a minimum wage will, in general, lower the premium that one can get from being better skilled – though we have to admit that a bigger factor here is that a huge proportion of individuals on low income (especially if not single) are facing combined tax and benefit withdrawal rates of 80% plus.

I don’t think a one size fits all minimum wage is helpful. In London £5.73 per hour may be justified but not in a depressed local economy.I think we need to integrate all taxes, benefits and allowances and the minimum wage into one unified tax system otherwise we will never solve the 80% withdrawal rates on tax and benefits.

unemployment will increase in part to the minimum wage as more small firms close not being able to aford the increase.

Could you live on the minimum wage.!
How could you rent or buy a house.
How would you heat your house.
After paying all bills could you buy food.
THE PROBLEM IS BENEFITS THAT TOP UP THESE VERY LOW WAGES,IF NO BENEFITS WERE GIVEN THEN EMPLOYERS WOULD HAVE TO PAY A REAL WAGE.
Minimum Wage is third world rates.

And just to add I was an employer for 15 years,people are getting less now than they were back in 1990.

As economists I am surprised at the lack of supply and demand mentioned here. Living on minimum wage is a fragile existence. It is little more than you get on benefits (housing benefit + jobseekers.) The government have suppressed wages at the lower end of the scale because they have allowed more entrants into the labour market via immigration.If the government reduced the minimum wage to £ 3.60 per hour, £144 for a forty hour week, nobody with a child would be able to pay the rent, bills, council tax, grocery costs, pension contributions. More people would emigrate or leave work and sign on. This theory is about as much use as Anne Frank’s Drum Kit.

If an employer does not want to pay a living wage to do a job, then perhaps he should just get off his backside and do it himself. £5.73 is hardly an exhorbitant sum, and I think any employer that would ask anyone to work for less than a living wage should seriously question whether he is fit to be an employer.

And I meant to say a big thank you to craig – who proves that there are (or at least were) employers out there who do not expect something for nothing.In my own area, when the minimum wage was introduced, it worked against a fair number of people – some of the employers decided to postpone orders, get rid of a lot of their staff, wait a couple of weeks and then advertise the jobs at less than they had originally been paying, NOT to keep their Company alive, but to increase their profit margin. If you exploit people like this you deserve to loose your businesses.

Whether or not the minimum wage is not enough to live on is a red herring - the workers who work for minimum wage are usually not those who must pay for a family. It allows those (usually teenagers/younger workers) to contribute to their own costs, rather than being unemployed and being paid for inevitably by someone else (either family or government[taxpayers]). As well as this, it allows them to gain skills that will allow them to move on to a higher wage in the future - an opportunity that many people would happily earn a lower wage to have, rather than not work at all. As well as this, as a "greater incentive to sign on"; being unemployed would surely be a very good incentive to "sign on", and surely there would be a connection between any minimum wage system and real benefits rates - wage rates surely cannot remain lower than benefit rates for very long.

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