Len Shackleton

The minimum wage is broken – here’s how to fix it

The minimum wage is broken – here's how to fix it
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While welcoming George Osborne’s emphasis this week on raising employment, I have some caveats about his target – to have the highest employment rate in the G7. This isn’t hugely challenging. Those in employment currently amount to 71.2 per cent of the UK population of working age, well ahead of Italy (55.5 per cent), France (64.1 per cent) and even the USA (67.4 per cent). Germany, at 73.5 per cent, is the current table-topper and the one Mr Osborne aims to overtake.

Aggregates like this, though, are dodgy to interpret and are affected by differences in age cohort size and other factors.

For example, the rising numbers of younger women in the workforce with degrees will almost certainly boost employment rates in the next few years, as will immigration flows and the increase in the state pension age. It will then be difficult to discern exactly what part Mr Osborne’s efforts will play in any rise in employment.

No doubt his heart’s in the right place. But what’s he doing? He rightly points out that the public sector cannot really create jobs and that the private sector has to do the dirty work. Yet it can only do so if businesses find it profitable to take on extra workers, or extend hours for those they currently employ.

They can’t do this if employment regulation continues to increase, as it has under the Coalition, with increases in parental and other leave, rights to flexible working, pension auto-enrolment, restrictions on employing foreign workers and agency staff, and threatened limitations on zero-hours contracts.

Another area where George Osborne is decidedly flaky is the National Minimum Wage. Although the government has accepted the Low Pay Commission’s recent recommendation, he is on record as wanting a more substantial increase. Other conservatives, notably Boris Johnson, are flirting with the Living Wage, an hourly rate dramatically higher than the NMW. As Ryan Bourne and I argue in our new IEA publication The Minimum Wage: Silver Bullet or Poisoned Chalice?, such ideas are ill-advised.

Minimum wages are poorly targeted to deal with poverty, with many beneficiaries in non-poor households while the real problem – as Mr Osborne realises - is those with no jobs.

We suggest regionalisation of the NMW, as its ‘bite’ varies so considerably around the country. While the NMW is less than 40 per cent of median hourly earnings in London, it is 60 per cent in Wales. To maximise private sector employment then, minimum wages could be set by region to reflect productivity and firms’ ability to pay.

We are also recommending abolition of the minimum for under-18s. With very high levels of youth unemployment, young people without skills need to be priced into work. We should of course be working to improve those skills – our performance in schools and collages is still far from adequate, as the British Chambers of Commerce pointed out again yesterday – but Mr Osborne won’t improve matters by listening to the ‘economics deniers’ who insist that wage levels have no effect on employment.

J. R. Shackleton is Professor of Economics at the University of Buckingham and editor of Economic Affairs. He is co-author of the Institute of Economic Affairs paper The Minimum Wage: Silver Bullet or Poisoned Chalice? which is published today.