Warped logic – attacks on the minimum wage

By Dean Brown

This week, spokespeople ranging from Mark Littlewood, Institute of Economic Affairs, Roger Pedder, Unquoted Companies Group and Adam Marshall, British Chambers of Commerce, have called for the minimum wage to be frozen, cut or even scrapped altogether.

The main reasoning given for these measures is the claim that the minimum wage is stunting the ability of young people to find work. At present, around 40% of the people officially counted as unemployed in Britain are aged between 16 and 24. “The concern is that the current rate is discouraging some employers from taking on young people and giving them a chance to get into the workplace,” Adam Marshall claims. “Some companies are finding the rate is a real problem.”

Marshall’s point is very debatable in that it contradicts much current research published on the effects of the minimum wage. For example, according to a 2011 paper published by the National Institute for Economic and Social Research, at the point when men and women turn 22 and become eligible to receive the highest rate of minimum wage:

“[W]e find a 2-4% point increase in the employment rate of low skilled individuals. Unemployment declines among men and inactivity among women.”

So, when a higher rate of minimum wage comes into force, there is a direct correlation with lower unemployment. Instead of employers being put off hiring young people due to increases in the 16-17 and 18-20 rate of minimum wage, young people are put off from working until they are eligible for the higher rate. However, Adam Marshall has advised that the minimum wage be frozen for young workers, “followed by a consultation with employers about a gradual reduction in the rate.”

If the lowest rate of minimum wage was cut, which currently stands at just £3.68 an hour, the poorest young people in society would suffer. This scenario would in fact push more people towards favouring benefit payments as the only feasible way to live, further hindering efforts to decrease the youth unemployment rate.

All three of Pedder, Littlewood and Marshall represent business pressure groups – so it is perhaps unsurprising to hear of their aggression towards the minimum wage. But their short sightedness and eagerness to use youth unemployment figures as justification to pay young people less is disappointing. As Gavin Kelly notes in the New Statesman:

“In a world where few policies have a straightforwardly positive impact… the minimum wage stands out as something of an exception.”

Cutting the already meagre lowest rate of pay for the youngest workers will not help the UK emerge from recession. It will reduce the spending power of younger people, discourage them from taking work, starve British business of manpower and set a bad example as the pay of FTSE 100 executives continues to rocket. The recent increases to the minimum wage run way behind the current rate of inflation, and cutting the rate as a way of giving young people more incentive to work is the very finest in warped logic. But despite this it remains unclear whether the Low Pay Commission – the body that sets the minimum wage – will resist the calls to freeze or cut the rates in 2012 or not.