The headlines from the Labour Party conference at the weekend included a suggestion that they wanted to increase the minimum wage, as it had lost value in real terms over the last five years. An increase of 45p an hour was mooted. Ed Miliband seemed to row back from this somewhat on Sunday, floating some nonsense about different minimum wages for different sectors, and talking about increasing fines for employers breaking the minimum wage laws (no one gets fined now, so it’s not clear what increasing the fines would do). Ed Balls then mentioned raising the minimum wage in his speech today, so maybe it is on the cards.
This kind of talk leads to furious whingeing from big business about how raising the minimum wage would increase unemployment. It’s always couched in terms of small businesses being unable to afford to pay higher wages. But do they have a point?
An increase in the minimum wage would increase costs for the minimum wage employer. This may lead them to lay off staff all other things being equal. But all other things are not equal. If wages go up, so do the incomes of their workers. Those workers will be able to buy more stuff which will increase the profits of businesses. If the increase in sales is significant enough, employment might actually rise following an increase in the minimum wage.
But will incomes actually rise? Won’t the increase in wages just be offset by a reduction in payments of tax credits? Well yes. But by no means all minimum wage workers are eligible and/or claim tax credits, so there will still be a positive increase in income at the lower end economy-wide. And if less tax credits are being paid, this creates room for tax cuts, either on individuals (who then have more disposable income) or on businesses (to offset the increased wage bill).
So while it’s possible increasing the minimum wage could increase unemployment, it’s equally, if not more likely that unemployment would be either unchanged, or actually fall as a result.
And if unemployment does rise as a result, is there anything the government could do? Yes, it could strengthen the safety net, by offering a guaranteed, public sector job paying the same wage to those displaced by the increase. This would create a healthy competition for workers, and competition is good right?