Tony Blair today announced plans to cut the jobs and hours of low-paid workers.
He’s going to raise the minimum wage, from £4.85 an hour to £5.05 in October. This as the Low Pay Commission recommends in its report today; it also recommends a rise to £5.35 in 2006.
The first rule of economics, of course, says that if you raise the price of something, you’ll reduce demand. And this means shorter hours and job losses for some of the low paid.
The Low Pay Commission pretends this won’t happen. Its chairman Adair Turner says: “Our analysis suggests that previous upratings [to the minimum wage] have largely been absorbed without adverse effects.”
Can I give Mr Turner some advice? Try reading your own report matey.
In particular, appendix 3, which starts on page 213 of this pdf. It contains a survey of employers who were affected by the rise in the minimum wage in 2003. It shows that: 37 per cent of them cut staffing levels, whilst only 4 per cent raised them; 31 per cent cut basic hours worked whilst 3 per cent raised them; 28 per cent cut overtime hours; 81 per cent said their profits fell; and 63 per cent said they raised prices.
This, of course, is exactly what basic economics would predict. It corroborates this research, which shows that where the minimum wage bites hard – for example in care homes – it does reduce labour demand.
Which raises the question: how could anyone ever have thought otherwise? For example, TUC general secretary Brendan Barber: "Employers and politicians who said that [the minimum wage] would cause job losses have been proved wrong year in, year out."
One reason is that there is some research (like this pdf) which shows that the introduction of the minimum wage did not reduce employment.
Another reason is that advocates of the minimum wage focus on its macroeconomic effects, where any impact of the minimum wage would be too small to be detected. For example, the Low Pay Commission estimates that 2004’s uprating added just 0.08 per cent to the aggregate wage bill. Assuming a price elasticity of demand for labour of 0.6, and that all the adjustment came in job losses rather than shorter hours, this would have cost just 13,000 jobs. That’s equivalent to less than two days inflows into the unemployment figures.
So, the bottom line is clear and official – the minimum wage costs jobs.
This wouldn’t be so bad if it raised the incomes of the poor. But the impact here is small. For one thing, many minimum wage earners aren’t poor. And for another, those that are poor will (eventually) see their tax credits cut as their wages rise – if, that is, they keep their jobs. The Institute for Fiscal Studies estimates (table 4 of this report) that over 1.7 million working parents face a marginal tax rate of over 50 per cent.
Now, I’m not denying that some people will benefit from the higher minimum wage. Those who keep their jobs and hours will do so, at least marginally. And tax-payers will have a lower tax credit bill. But these gains come at a cost – of lower hours and jobs for some of the low-paid, and lower profits for many small businesses.
There’s no such thing as a free lunch. To pretend otherwise is either dishonest or economic illiteracy.