The Debate: Is Britain’s minimum wage too high?
Rishi Sunak has confessed minimum wage hikes he oversaw were too high. But is raising wages during a cost of living crisis really so bad? We hear both sides of the argument in this week’s debate
YES: Successive governments have used the minimum wage to get good headlines
Econ 101 states: don’t be surprised that when you raise the price of something, demand goes down. Britain’s national living wage is the highest in the G7 in absolute terms. It has risen by almost a third in real terms over the past decade. Since Labour has been in government the minimum wage for 19-year-olds has increased by 26 per cent – way above inflation. Now the bills associated with Labour’s policy choices are starting to add up.
Retail and hospitality account for a third of all minimum wage jobs and nearly half of all employment for under-25s. Both sectors are leading the fall in vacancies and payroll numbers. They are withdrawing from the market. Youth unemployment is at an 11-year high, 16.2 per cent. For the first time, Britain has a higher youth unemployment rate than the EU average. And yet, nobody is questioning the policies creating this.
The minimum wage was designed as a floor. Successive governments turned it into a ratchet: easy headlines about giving Britain a pay rise, with the trade-off buried. But trade-offs do not disappear because politicians ignore them. The effects are clear as day. For every £25 spent on young people on benefits, £1 is spent on getting them back into work. When it costs the same to hire an 18-year-old with no experience as a 30-year-old with a decade behind the till, businesses make the rational choice.
The solution: freeze the rates. Restore a meaningful youth differential so that hiring a teenager is not the same gamble as hiring someone with experience. Stop treating the minimum wage in isolation: stacked on top of the employer NI rise and the Employment Rights Act, it is part of a cumulative cost shock that is pricing the youngest and least experienced out of the labour market.
Joanna Marchong is head of communications at the Adam Smith Institute
NO: Reducing the wage amid a cost of living crisis would be a disaster for low-paid workers
The minimum wage is one of a rare breed in modern Britain: a genuine economic policy success from the last 30 years. When it was introduced, more than a fifth of workers were stuck in low pay after two decades of worsening pay inequality. By its 25th birthday it had set pay inequality into reverse, boosted the pay of the nation’s lowest-paid workers by £6,000 a year, and reduced the number of workers in low-paying jobs.
When Tony Blair committed to follow other advanced economies by introducing a statutory minimum wage, he declared it was “merely the due claim of civilisation”. It is still a vital instrument of social protection, maintaining the living standards of the UK’s lowest-paid workers. With prices rising and another cost of living squeeze hitting households, this protection remains essential.
Of course, there are trade-offs. Businesses are feeling the squeeze of rising costs and minimum wage hikes have added to these pressures. A business owner anticipating tighter margins may feel forced to cut back on shifts or delay hiring plans. These decisions also impact workers’ incomes, and younger workers are often the first to suffer from a hiring squeeze.
The minimum wage must be set with these trade-offs in mind. The policy’s broad aim – to keep pay for low earners in line with the rest of the working population – is right. Raising the rate too quickly may prevent businesses from hiring, and ministers should be mindful of this risk. But under no circumstances should they seek to lower the rate. This would be a disaster for low-paid workers when they can least afford another hit to their living standards.
Joseph Evans is a research fellow at IPPR
THE VERDICT
Raising pay for the poorest workers – who could object to that? Quite. Such is why it’s been so attractive a lever for Prime Ministers to pull, but not without cost – as former PM Rishi Sunak himself this week admitted. In an enlightening column for The Sunday Times, Sunak, who oversaw a 9.7 per cent increase in the National Living Wage, said he regretted not being “braver” when in office: “I decided that for a multimillionaire chancellor to overrule the Low Pay Commission without any covering fire wasn’t politically sensible.” It may, however, have been economically so.
As employment expert James Reed has pointed out in these pages, the cost of hiring a 21-year-old working 40 hours a week, wages and taxes included, is now at least £29,654, an increase of over 70 per cent in the last five years. It’s hard for anyone to argue that is sustainable. Should we cut the minimum wage now? Not quite (it is hard to take back what one has given). But ministers would do well to stop treating hikes as political, rather than actual, currency.