A minimum wage increase is long overdue

An increase in the minimum wage is long overdue.

Minimum wage versus inflation-JPEG

George Osborne’s comments this evening that he wants to see an above-inflation increase in the minimum wage are long overdue.

Since peaking at 9.6 per cent above inflation in 2001, the value of the minimum wage has gradually been overtaken by inflation.

Inflation levels surpassed the minimum wage percentage in 2008, the biggest difference between the two coming in 2011, with inflation percentages being almost 2 per cent above the minimum wage.

As well as failing to keep up with the cost of living, an analysis by the Resolution Foundation last year found that a worker on the minimum wage would need to work for 380 hours a week to match the annual salary of someone in the 99th percentile.

The research was, interestingly, released just a week after the government announced that the minimum wage would rise to £6.31 from October 2013 – the fourth straight annual fall in the real value of the minimum wage once inflation is taken into account.

Today’s comments by Osborne have come as something of a surprise. Just last year the Low Pay Commission, which sets the minimum wage, was warned by the government that it ought to consider the impact on employment and the economy before agreeing future increases.

The economy is unarguably in a better position today than it was in April 2012, which in part explains the chancellor’s newly found optimism: “we should enjoy fruits of our hard work,” he said today.

A much bigger factor in the decision, however, will be politics. The Tories were caught off guard back in September by Labour’s pledge to freeze energy prices. They don’t want to be caught in such a reactive position again; and Osborne, canny political operator that he is, is making sure the cost of living narrative is not strictly Labour territory.

7 Responses to “A minimum wage increase is long overdue”

  1. Anon

    With only a 168 hours in a week that would clearly be in possible. Fortunately, approximately 50% of the wage earned by the top 1% gets paid back as Tax. Despite this slightly manipulative, yet seemingly intelligent statement, it should be remembered that it’s government responsible for that top 0.5 % of money earned that is responsible for its redistribution. It should be remembered that the top 1% of earners are always going to be a lot more well of than the bottom 1%, who, incidentally, contribute a lot less in tax.

  2. Timmy2much

    The only way to get low pay back up to a living wage is to
    1 – lower the population size.
    2 – Start paying top earners in free time – ie someone on 500k for 45hrs goes to 200k for 22.5hrs (50k less because free time is worth more) then you can employ 2 people doing that job and increase wages / create jobs with the remaining 100k

  3. GO

    “1 – lower the population size.”
    You seem to be assuming that the amount of labour available is fixed, so that if the size of the population were lowered, there would be fewer workers competing for the same number of jobs. But if the population were lowered, demand for all sorts of goods would fall and so the amount of available labour would fall.
    2 – the lump of labour fallacy again. You’re assuming that there’s a fixed amount of (high-value) labour available that we can just choose to share around differently. You’re also assuming that for everyone currently earning 500k or more, there’s somebody else waiting in the wings who can come in and do the same work to the same standard. And your assertion that ‘free time is worth more’ makes no sense; if free time was worth more to the high earners you’re talking about, they would reduce their hours of their own accord and accept a natural fall in earnings. Instead, they choose to work more and earn more.
    The way to get low pay up to a living wage (for the first time – not *back* up to a living wage) is 1 – to increase productivity, and 2 – to increase the share of national income going to wages rather than profits. (Actually there is a chicken-and-egg element to 1 – raising wages can drive an increase in productivity as well as following one).

  4. GO

    Yes, the highest earners are always going to be a lot better off than the lowest earners, but there’s no need for the gap to be as large as it is. Nor is there any need for the highest earners to pay so much tax in order that that money can be redistributed to low earners. From every point of view other than the narrow self-interest of the highest earners, it would make more sense simply for high earners to take a smaller pre-tax share of national income and low earners a larger share.
    Suppose we start out with 1,000,000 minimum-wage workers earning £12,000 each and 100,000 very high earners earning thirteen times as much on average, £156,000. Now suppose that, over time no doubt, we reduce the share of the pot going to the highest earners and increase the share going to the lowest workers (simply by giving them bigger pay rises). Assuming the size of the overall pot stays the same (in today’s prices), all it would take for the minimum wage earners to be paid a living wage (£14,500) would be for the highest earners to learn to scrape by on £131,000 – still nine times as much.
    If the Tories believe half the rubbish they talk, they should sign up to this like a shot. It means the rewards for ‘hard work’ are greater. It means the effective tax rate on the highest earners is lower. It means the proportion of overall taxes paid by the highest earners is lower. It means the welfare bill is lower. It means more people are able to ‘stand on their own two feet’ rather than being ‘dependent on welfare’. It means more people can ‘do the right thing’ and save for retirement. It means more people can buy their own home.
    Of course, it also means that a small minority of exceptionally well-off people would have to get used to being slightly less exceptionally well-off, but the Tories wouldn’t oppose it just because of *that*… would they?

  5. Timmy2much

    “if the population were lowered, demand for all sorts of goods would fall”

    Yes but not at an equal amount to the reduced population. For example if a shop has 100 customers; it takes 2 workers to service the customers.

    If you reduce the number of customers by 5 then you would reduce demand but not to the point of someone losing a job in this example – you would have to scale things up by a factor of 10 – so 1000 customers going to 950 customers before 1 person loses their job.

    Another way of putting it – if we got rid of 50% of people washing cars would the demand for cars to be washed fall by 50%. Answer; no.

    There is some inflationary effect though.

    2 – You’re assuming that there’s a fixed amount of (high-value) labour available that we can just choose to share around differently.

    – No I used that high value as an example the same principle works at lower wages but the chances are someone will decide to only take an extra 2hrs or 5hrs a week, this isnt without problems of course but if you got 9 people in a company to work 5hrs less per week you could employ someone else to take the strain. This is very dependant on individual companies, how they are set up, what functions each person covers etc and as such can only be argued on a case by case basis – it wont work for all.

    “there’s somebody else waiting in the wings who can come in and do the same work” – This might be true for the really high paid jobs however it does not mean all jobs dont have someone capable of taking over at least some of the role, plus we have a lot of educated individuals who are underemployed – with training (which you would have more time to do if you worked 5hrs less) you could fill most of those positions given enough time.

    The banking sector already see’s this happening btw so to say “Instead, they choose to work more and earn more” is not true of everyone, but it is a valid argument and largely one of personal choice however I would bet more people would do it IF it was a more common option.

  6. GO

    Respectfully, I suggest that you Google ‘lump of labour fallacy’. Your line of thinking might seem like ‘common sense’, but economists are pretty clear that it’s mistaken.
    If you’re talking about what happens when people disappear from the economy altogether, rather than what happens when they just stop going to a particular shop, you need to take a much wider view. It’s not just that those 5 people don’t buy their meat from Dave’s Butchers any more. They don’t buy *anything* from *anywhere* any more. Nor do they generate any profit for their employers, or use any public services. Now scale it up so that (say) 5,000,000 people disappear from the economy. That makes a real difference to the number of people who can make a living as shop assistants – and as landlords, plumbers, nurses, teachers, taxi drivers, etc. etc. So employers won’t suddenly be struggling to fill 5,000,000 vacant positions – those vacancies will just vanish as the economy scales itself down according to population size.

  7. Timmy2much

    “Foremost, these economists argue, employment of labor can expand the overall size of the economy, leading to further job creation. Reducing the amount of labor employed would decrease overall economic activity and thus further decrease the demand for labor.”

    National GDP in this country has shrunk when measured against the population size. That is because most the additional labour that has been imported is employed in the low skilled market.

    At this point you’ve got to ask how much additional economic activity is created by low skilled workers, which is where the competition is – its not at the top end like doctors where we are experiencing a shortage. Transport is overcrowded, our power supply is stretched, school places (particularly primary) are at a premium and there is not enough housing stock.
    My point here is that we have recently increased the population which has increased demand but that demand has not equated to relative job increases across the board because there isnt the money.

    You then have to ask how many of the 5m are needed to service that 5m?

    On top of this technology is likely to make some low skilled jobs obsolete as far as employment is concerned displacing those people to other markets.

    Now

    What happens when you combine both points that I was making.
    1. People with more free time will indulge in leisure activity.
    2. People with more free time will look to gain further qualifications.

    both will create jobs to help offset some of the jobs lost.

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