The Tories need a rethink on the minimum wage

Article by Mark Littlewood for the Daily Telegraph (online)

With rising unemployment and falling productivity, maintaining the present minimum wage structure is a triumph of woolly-headed aspiration over economic reality, says Mark Littlewood.

With youth unemployment rising to 1 million, the Government – or more realistically the Tories – need a radical rethink of the how the British labour market works. Or more to the point, how it doesn’t.

David Cameron has been right in highlighting the absurdity and outrage of Britain’s poverty trap – whereby those on relatively low wages have little or no incentive to work as opposed to claiming welfare. And, no doubt, applying pressure to those who are essentially fit to work but on the swelling lists of incapacity claimants is a long overdue move. But, at the moment, the Conservatives are only telling half the story.

The full, and substantial, cost of Britain’s minimum wage legislation is becoming increasing plain to see. In times of plenty, the impact it had on pricing employees out of the labour market was less dramatic. But in the depths of a recession, it acts as a real barrier in getting people back to work. This is especially true of the young.

You can only get people out of the dole office and into the workplace if companies are willing to foot the bill. In the present economic climate, it is surely the case that there are swathes of jobs that need doing but that cannot justify an hourly wage of £5.80. You can’t persuade, cajole or incentivise people off welfare benefits into jobs that don’t exist for the simple reason that minimum wage legislation makes them illegal.

Unemployment amongst graduates is woeful – with one in ten failing to find a job six months after leaving university. We need to give these people a chance to get their foot on the career ladder – even if this means them having to start out their professional lives on a wage less than the state-stipulated £4.83 an hour for those aged 18 to 21.

The present rules make taking on young people for work experience a potential legal minefield for the employer. If you expect your volunteer to attend the office at designated times and to carry out and take responsibility for specified tasks – precisely the sort of experience a young person needs – then you need to brace yourself to pay them the minimum wage. If you offer them a modest stipend, this might look like an attempt to pay an illegally low retainer. Better to play it safe - pay them nothing at all.

With rising unemployment and falling productivity, maintaining the present minimum wage structure is a triumph of woolly-headed aspiration over economic reality. Cameron’s Conservatives are determined not to be painted as hostile or unsympathetic to those on modest incomes. But, hopefully the Tory leader wants to win the economic battle against unemployment and not merely a presentational battle against his political opponents. If that’s true, he needs to do more than slow the growth of the minimum wage – he needs to commit to putting it into reverse.

Mark Littlewood is the former Head of Media for the Liberal Democrats. He becomes Director-General of the Institute of Economic Affairs on December 1.

Further reading:

IEA blog articles about the minimum wage
.

The Minimum Wage: No Way to Help the Poor by Deepak Lal.

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