At Last, the Minimum Wage Debate Is Growing Up

27/03/2013 15:46 | Updated 27 May 2013

While low pay and in-work poverty have risen up the economic agenda in recent years, our policy debate has been stuck in a loop. Ask most Labour politicians about low pay and you can expect a well-intentioned but passive mixture of pride in the minimum wage and warm words on the living wage before the topic is changed to the importance of protecting support like working tax credits. Turn to a Conservative and the ingredients generally differ but are no less predictable, giving little more traction on low pay itself: a worrying silence on the minimum wage, a touching faith in general skills policy (and a falling skills budget) to help the lowest paid, before a swift change of topic to the importance of tax cuts.

With so few people willing to look low pay in the eye, this morning's speech at the Resolution Foundation from influential Conservative MP Matthew Hancock was commendable. In arguing that there is now a pressing need to address the chronic challenge of low pay, Hancock said Conservatives "should not only support the minimum wage, but strengthen it". By addressing the minimum wage, too often the unfashionable older sibling of the Living Wage, directly, he gave rare attention to the single policy that has done more for the low paid than any other. Of course, there is still much to do, in particular to flesh out what strengthening the minimum wage would actually mean. But the value of a consensus from all parties to "act on unjustified low pay" - and an agreement that the minimum wage must be part of this - should not be underappreciated.

On the minimum wage itself, this is progress for a simple reason: rather than rehashing squabbles about employment effects, it starts from where the evidence base is today and builds from there. The debate is entering a new phase. Chart 1 shows how overdue this is, pulling together nearly 1,500 results from 64 different studies of the employment effects of the minimum wage. It tells a simple story: yes, you can pick the odd study showing that the minimum wage causes unemployment. But the overwhelming balance of evidence says no. Acknowledging this finding makes progress possible.

Chart 1: Effect of the minimum wage on employment
1,500 collected findings from 64 academic studies


Source: Doucouliagos and Stanley (2009)

So where should the conversation turn once the centrist view in all major parties is that we should build on the minimum wage? A useful place to start is by asking: why didn't the minimum wage cause unemployment? As a recent paper from US think tank the Center for Economic and Policy Research points out, many years of minimum wage studies have told us a lot about this question, giving important insights into the way low paid jobs markets work.

The first lesson is that the simple hydraulic view that 'pushing up wages pushes down employment' is an unhelpful way of thinking about the world. It turns out that, even in competitive jobs markets, employers can respond to higher pay in many different ways. Yes they can lay off people or cut their hours or other benefits. But they can also raise prices, compress pay differentials and squeeze profits. Interestingly, their ability to do all of these things varies by sector. And perhaps most importantly, the overall cost for many (though not all) employers of a higher wage floor just aren't that high - even in relatively low paying sectors. This helps to explain how adjustments have been made with no employment effect.

Second, jobs markets aren't perfectly competitive. It costs money and effort to replace even low paid workers and for low paid workers to find other jobs. This means that, for example, if a higher minimum wage reduces staff turnover it can reduce costs, offsetting the need to cut staff. The lesson is that we should resist the simple idea that every worker is paid exactly what they're worth, so that any forced increase in pay makes them loss-making. Lots of people aren't paid what they're worth, and in any case it's very hard to know when they are. Again, this is why minimum wages, and things like increased bargaining power, can boost pay without always harming jobs. In some cases they can even boost employment.

Third, and perhaps most importantly, employers aren't single rational individuals, they're organisations guided by different human judgments, not always operating at the peak of efficiency. Is it worth bothering to re-organise your workers to get more out of them? Maybe, but the pressure to do so also rises if the minimum wage goes up. This is revealed in evidence that some firms have responded to a higher minimum wage by boosting productivity, either investing in skills or re-organising the way they do things. It means that, while there may be short-term costs to a minimum wage that's too high, there might also be long-term costs for the economy in not being ambitious enough. Some countries do more than others to push firms out of low paid, low productivity business practices. The minimum wage is one part of this.

Together, these lessons from what we've learned in the past 15 years need to guide where we go next. This morning's speech was valuable in banking the consensus that there's no point rehashing 1990s arguments about the minimum wage; we should start from what we know now and build from there. There is broad academic agreement that the minimum wage boosted pay and didn't cause significant unemployment. We can say with confidence that it should be strengthened. To flesh out what that means we'll need to start from the other lessons we've learned.