Ryan Bourne

No, it is not a good idea for the Tories to raise the minimum wage

There’s so much to disagree with in Rupert Myers’ piece arguing that the Tories should raise the minimum wage that it’s difficult to know where to begin. Raising the minimum wage will be bad for the most vulnerable in the workforce and will lead to less employment. The question of whether it would win support for the Conservative party is another matter.

This is really basic economics. Raising the price of labour by dictat will reduce the demand for it, other things given. Or as Paul Krugman put it back in 1998:  ‘The higher wage reduces the quantity of labor demanded, and hence leads to unemployment.’ 

It might not necessarily lead to a fall in the actual number of people employed, because firms also have the option of cutting back the hours of workers as well. But there will be less overall employment than before. Add to this the fact that raising the minimum wage will lead to an increase in the supply of workers (think more young people than otherwise dropping out of education to enter work, more home-makers deciding that it is worth their while to go back to work, or even more immigration), and you can see there’s a double hit for the very low skilled workers, who will be crowded out of finding jobs by their more skilled peers.

Evidence from America, for example, finds that a 10 per cent increase in the minimum wage depresses teenage employment between 1 and 3 per cent. Of course, this all depends on where the wage is set. Canadian research has suggested that so long as minimum wages are set below 40 per cent of average earnings of the group, the effects on employment are small. But unfortunately for the young here (the age group most likely to be scarred by the effects of long-term unemployment) 2011 figures for the UK youth minimum wage as a proportion of the average wage were 65 per cent for 18-21 year-olds, and as high as 76 per cent for 16-18 year olds.

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