Last updateFri, 24 Mar 2017 12pm


Is It Time To Cap The Minimum Wage?

Britain’s unemployment rate has not been the economic indicator most closely watched by business, but the monthly data has taken on a new importance now the Bank of England is using it as the trigger for raising interest rates. And it gives companies a mixed objective. On the one hand, firms know that by taking on staff they are helping with the country’s economic recovery; on the other, they are bringing forward the date when they will have to pay more to finance the expansion that warrants creating those jobs.

Bank governor Mark Carney provided his ‘forward guidance’ on interest rates in August 2013 when the unemployment rate was 7.8 per cent. He set a benchmark of 7.0 per cent for triggering an increase in bank rate and suggested that would be in mid-2016.

However, the headline unemployment rate has been kept low during the financial crisis by workers and employees making compromises that have kept the dole queues shorter than they otherwise would be.

Companies have ‘hoarded’ labour, hanging onto staff even when there is insufficient work so that they have a trained labour force ready for when the upturn comes. They have also cut back on capital expenditure, continuing with labour-intensive processes. And staff have accepted pay freezes rather than reduce the workforce or agreed to cut overtime so that more people have jobs. Part-time work and job-sharing have kept up the number of people with jobs and early-retirement or continued education keep people out of the labour market. Meanwhile attempts at self-employment disguise unemployment for many people and zero-hours contracts has created an army of workers who often don’t work.

Unemployment has thus been spread across the population rather than concentrated on a few. That’s why, despite a recession, there are a record number of almost 30m people with jobs. While the 2.5m people who are officially unemployed may not think a rate above 7 per cent is low, the total is far below the 3m or more that was predicted by economists and it is far below the rates in most other developed countries.

So although the Bank governor is waiting for unemployment to fall, it is starting from an already low rate and further reductions may be limited. As the economy starts to support more output, some of the work will go to those workers who are being hoarded, or who have been forced into part-time jobs or self-employment - or firms will re-introduce overtime rather than take on new staff. With youth unemployment at 20 per cent, employers may also find there is a skills shortage.
Carney’s own figures acknowledge the difficulty on cutting unemployment from a low number. He says a reduction to 7.0 per cent will mean creating 750,000 new jobs. But of course the rate would hit his target if just 250,000 of the 2.5m unemployed find work. The reason so many more jobs must be created is because Britain’s expanding population – particularly with people of working age - means more than 200,000 jobs have to be created each year just to stop the unemployment rate rising. Even commentators who accept that the UK economy is improving rapidly concede that finding that many jobs will be difficult. And many argue that wages cannot be allowed to rise significantly – despite the country’s recovering prosperity – because it would price workers out of jobs. Until recruiting becomes difficult, companies have little incentive to raise pay levels.

In particular, there have been renewed calls to freeze the minimum wage to encourage firms to take on more from help younger people and thus reduce youth unemployment.

The national minimum wage was introduced in 1999 at £3.60 an hour for people aged above 22 and £3.00 for younger workers. From October 2013 the rates are £6.31 for over-21s and £5.03 for over-18s. The rates are set by the Low Pay Commission but have far outstripped inflation over 14 years. The minimum wage has risen by 65 per cent since 1999 while other wages in the economy have increased by only 50 per cent, the retail price index is up 30 per cent and the consumer price index has risen by just over 20 per cent.

When the 2013 rates were set there were calls for a freeze - or even a cut. Instead they were increased by 1.0 per cent for under 21s and apprentices and 1.9 per cent for adults – well above the 1.1 per cent pay rise across the whole economy when many workers were accepting cuts. Already there are calls for the 2014 rates to be capped to make it more attractive to employ new staff.

The chief policy director at the Confederation of British Industry, Katja Hall, says: “Pay restraint has been crucial in creating jobs in this tough economic climate. The Low Pay Commission will need to monitor the impact of raising the adult rate very carefully. Given average earnings this year are already lower than expected, we must make sure that the minimum wage doesn’t limit jobs in key sectors by outstripping pay across the rest of the workforce.”

But others believe that raising minimum wages not only redistributes the nation’s wealth but also helps the economy by increasing consumer spending. Frances O’Grady, general-secretary of the Trades Union Congress, says: “Boosting the incomes of the low-paid goes straight into the economy and wage-led growth must be part of the recovery. We would have liked to have seen minimum wage rates go up further, even if the government has rightly rejected calls for a freeze.”
The TUC has also demanded tougher enforcement of minimum wage payments. HM Revenue & Customs is responsible for ensuring compliance, but despite powers to name offending employers, only one Leicester hairdresser had ever been exposed for breaking the law – even though in 2012-13 more than 26,500 employees received an average of £300 back-pay because their employers had paid less than the legal floor. HMRC investigated nearly 1,700 employers for alleged breaches and 708 firms received automatic penalties of upto £5,000.

From October 2103, there will be new powers to ‘name and shame’. The government is scrapping rules allowing exposure only of firms owing workers at least £2,000 with an average of £500 per employee. Employment relations minister Jo Swinson says: “This gives a clear warning to rogue employers who ignore the rules that they will face reputational consequences as well as a fine if they don’t pay the minimum wage. If employers break this law they need to know that we will take tough action.”

The TUC welcomes the move, with O’Grady saying: “Nearly a million UK workers rely on the national minimum wage, which has become a vital lifeline. There must be no hiding places for companies that flout it. We will continue to press ministers for more action to ensure the minimum wage is properly enforced – particularly for apprentices, where there is considerable evidence that many miss out.”

Charles Cotton, an adviser on rewards at the Chartered Institute of Personnel Development, claims: “If the UK is going to compete successfully in the global economy, we need to pay and train our employees properly. The national minimum wage is one way to drive up the quality of work, but it is in danger of being undermined by the short-sightedness of a few rogue employers.”

Some employers argued before 1999 that a minimum wage would lead to lower employment. They concede that time has proved them wrong but claim the booming economy before the recession allowed labour costs to rise. Now it is again being argued that a minimum above the market rate is deterring companies from creating jobs or making them prefer experienced workers to taking on inexperienced youngsters. There seems little realistic prospect of the minimum wage being abolished or cut but there is again pressure to freeze the floor so that companies take on more staff.

However, there is pressure not only to keep increasing the minimum wage, but for employers to pay a ‘living wage’ – a pay rate more than 20 per cent higher than the minimum wage that is supposed to reflect the cost of achieving an acceptable standard of living. Although there is no legal base to the living wage, some agencies are threatening to buy only from suppliers that pay the higher rate. The pressure on wage costs thus remains high – and if firms thus delay job creation, they will be delaying the date when interest rates rise.



Anne Lowe was managing director of a London business consultancy and ran a US-based promotional company. She now writes for financial and trade publications including The Business.

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