Increasing the minimum wage: an economic faux pas

The snap election this year saw the two mainstream parties set out their plans for increases in the minimum wage by 2020. Under the guise of good-natured altruism, the figures set out were more in aide of political posturing and are moreover completely unfeasible. In a slap-dash attempt to win more votes in a rash and turbulent election, the Conservatives proposed a 5% rise to £8.75 by 2020 and Labour proposed an absurd 20% rise to £10 an hour. Both, although one more detrimental to the market than the other, show the government’s lack of willingness to just let the free market work without its intervention.

What a government-set minimum wage doesn’t acknowledge is the simple economic truth that different types of labour are set at different market prices, and this is ultimately what leads to progression for working individuals. For example, a young person’s first job will be entry level, as their skills dictate their market price. This means they get lower pay for less valuable work: a job at a fast food restaurant counter commands less pay than a personal trainer, and that commands less pay than someone working as a lawyer or solicitor and so on. If the government sets the wage of the entry level job at £10 an hour, the wage increase is only superficial: the work done is still the same and employers that have to pay more valuable workers will have to raise their wages. The end summation of this is that there is no real increase, only a notional ‘bumping up’ at every stage of the labour market.

Even more detrimental than this superficial raise is the negative effect that an increased minimum wage will have on this lower job bracket, the bracket which is supposed to benefit most from it. The Conservative plan would increase employer’s costs across the board by £1 billion, and Labour by a gargantuan £14 billion. On average, this works out at an extra expenditure of £480 per single employee per year for Conservatives, and £2,000 for Labour. Business owners and employers will simply not be able to employ as many people, or alternately the people they do employ will have to work fewer hours. This is the bitter sting to young people on the labour market; they need training and new skills to increase their market value in order to get higher-paying jobs and ultimately a more fulfilling working life, not just more money. The consumer would also see an increase in the prices of goods, as employers will be forced to fill the gaps somehow.

The negative effects of these proposed plans are clear. The Institute for Fiscal Studies said in ‘Minimum wages in the next parliament’ that ‘there must also be a point beyond which higher minimum wages have substantial negative impacts on employment. That point is not known, which makes any large and sudden increase inherently risky’[1]. ‘Sudden’ and ‘risk’ are the key words there; three years is a very short time for an entire market to make huge adjustments.

So let’s suppose that the government left employers to pay their workers amounts that they see fit. Employers would not have to conform to a coercive minimum wage which seems wholly damaging to both worker and employer, but would rather have the market as a check and balance. Say that a job is taken that is conceivably worth £5.20 per hour, but employer A refuses to pay anything over £3.00. Worker A will leave for another job that pays them for their market value suitably, and employer A will soon find that he cannot get a work force. In effect, he will be ‘forced’ by his desire to make his business profitable to pay higher rates – a consequence of attempting to ignore market prices. The market is punitive in other ways too; worker A left employer A and went to employer B, who now enjoys a workforce that are content with their pay and are more productive. Employer A is a real market loser, with no workforce and therefore less produced goods (and in turn less sold goods). Also, if the consuming public were to inevitably catch wind of employer A’s exploitative rates, they may engage in a boycott of his business, really hammering in his inability to make profits. Just look at what has happened to Sports Direct in the wake of their rates and conditions being enshrined in scandal; they have lost their largest independent investor, Standard Life, who sold their entire 5.8% holding in the company three weeks ago.[2]

So while the Conservatives plan to raise the cost of employing 2.8 million workers by 4% in 2020, and Labour 7.1 million workers by 15%, a free and unhampered market sits evermore in idle. By taking choice away from employers, the government coerces again to detrimental effect, where the natural checks and balances set by the free market would more than suffice. In a time of party political uncertainty, it seems that both mainstream choices are willing to gamble on a risk which could see huge unemployment (and with the immense pressure Labour plan to exert in particular, would see huge unemployment). This, all in a hurried attempt to either cling onto or take control of that all-important power stage – at a cost to employer and worker alike.
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[1] Institute of Financial Studies, ‘Minimum wages in the next parliament’, 2017
https://www.ifs.org.uk/publications/9205

[2] The Guardian, ‘Sports Direct loses biggest independent investor’, 2017
https://www.theguardian.com/business/2017/aug/03/sports-direct-loses-biggest-independent-investor-standard-life-aviva

One thought on “Increasing the minimum wage: an economic faux pas

  1. Great post. Minimum wages ultimately price out those with the least skills/ market value- those whom it’s supposedly most meant to help.

    Like

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