The precarious success of the national minimum wage
This piece was first published by Prospect here.
The UK minimum wage has been a great success story since its introduction in 1999. Twenty years on, it is at risk of becoming overly politicised in a growing arms race between the two main parties, both eager to claim the credit for boosting the earnings of millions of low-paid workers across Britain.
In reality, the policy success owes a lot to its institutional setup, in which politicians delegated the responsibility to a social partnership of experts, who came together and formulated minimum wage policy based on careful, evidence-based economic research rather than an ideology-driven agenda.
However, political parties now seem to have forgotten the lessons of the past, and gone into a political bidding war of who can offer the highest minimum wage. Currently at £8.21 an hour, Labour has pledged a £10 minimum wage by next year and the Conservatives plan to increase the level to £10.50 by 2024. Both proposals would take the UK into uncharted waters and place our minimum wage as one of the highest among similar countries.
If the parties decide to plough through and aim for short-term electoral gains, this would further politicise the UK minimum wage and risk undermining its strong institutional foundation. Most importantly, a dogmatic approach risks setting the level too high, which could severely damage the employment prospects of millions of hard-working people.
Of course, setting the level of the minimum wage is ultimately a political decision taken by the government of the day, just as it was a political decision when the Labour government introduced it in 1999. At the time, it was opposed by the Conservative Party and there were even diverging views within the labour movement, as it represented a significant departure from collective bargaining for low-paid workers.
Two decades later, one of the greatest successes of UK minimum wage policy has been the remarkable consensus across all actors in the British economy, including political parties. The policymaking was institutionalised through the establishment of an independent body known as the Low Pay Commission (LPC), comprising an equal number of representatives of employers, workers and academic experts. They were tasked with guiding the path of the minimum wage, and making recommendations to the government on annual increases.
Every year, the LPC analyses impacts on earnings and employment, commissions independent research, makes visits to businesses and workers across the country, and consults with a wide range of stakeholders across the economy.
Based on this, LPC commissioners have, quite remarkably, reached unanimous agreement about minimum wage increases every year for the past 20 years. This strong consensus has effectively depoliticised the process of setting the minimum wage, giving the government little reason to diverge from the LPC’s recommendations, and it has, in fact, accepted them every year.
This politicisation of the minimum wage really started in 2015, when the government rebranded the National Minimum Wage as the National Living Wage and set more ambitious targets for its future path. On the face of it, the decision paid off: available evidence suggests that the higher increases have continued to benefit low-paid workers, with little negative impact on jobs numbers. And indeed, a recent independent review for the government, conducted by an internationally renowned expert, found there is still scope to explore even higher minimum wages in the UK.
But the rebranding to the National Living Wage, with the stated intention to “end low pay” in Britain, also turned what was essentially a technocratic decision made by social partners into a politically charged policy issue.
The temptation for politicians is easy to see. Any rises in the minimum wage guarantee instant pay off and the policy can be presented as an appealing and simple-to-understand solution to raise living standards. Importantly, by side-lining the technocrats and social partners, politicians can claim credit themselves. In contrast, the potential costs of lost jobs are gradual and hidden, and could be harder to attribute to the decision to raise minimum wages.
So, both main political parties have thrown caution overboard. Their pledges wouldn’t require any magic money tree, but would involve gambling with the job prospects of hard-working British people. If the government raises the minimum wage by too much or too quickly, it may result in job losses for the very workers it was designed to help. And it may not be easy to undo this mistake. Reducing the minimum wage is only practically possible by waiting for inflation to erode its real value, and by that time businesses may already have made irreversible adjustments such as introducing labour-saving technologies or moving abroad.
Some policy areas are better left to technocrats and social partners, who are not running for re-election and looking for short-term electoral gains. Just like it is important to maintain the independence of the Bank of England to set interest rates, the LPC should be given a strong mandate to guide the future path and pace of minimum wages. The UK government has plenty of other policy levers in its toolkit to raise living standards, such as policy reforms on tax and benefits, education, housing, transport, childcare and social care. Its policies to end low pay and its consequences should focus on those.