Increasing the minimum wage is a good thing – or is it?
Increasing the minimum wage is a good thing – or is it?
A wonderful New Year to one and all, and hopes for a digital revolution!
I’m pretty sure most people will have heard that the minimum wage in the UK is to rise again and I’m also pretty sure that in general people think that’s a good thing. There will be some employers who will struggle with the increase but it will mean more lower paid workers getting a job. Or will it?
It’s worth looking at the origins of the minimum wage, about which I knew little or nothing until I read an extremely illuminating article by Mani Basharzad. It’s not the first article of his I’ve read and it certainly won’t be the last. He is a great shiner of light on matters economic.
The minimum wage started around 1913 in America, set at $3 per hour. As the average wage at the time was around $1.50, you might think this was a really progressive policy. But you would be quite wrong.
The minimum wage only applied to immigrants. Unless you are asleep, that should instantly make your jaw drop. The whole point was effectively to price “immigrants” out of work thus allowing “Americans” to get what work was going. I won’t go into the racist overtones here but they are not hard to see. Today, of course, the opposite is true – the minimum wage is intended to make it easier for disadvantaged groups to find work. In fact, the opposite is true. Employers can always underbid and cash works wonders. In effect, the minimum wage solidifies unemployment in those very groups, as employers steer clear of paying a wage from which they cannot profit sufficiently.
Go back 50 years and economists would have unequivocally stated that a minimum wage was a good thing. But as time has gone by, that consensus has fractured. Today, that near unanimous belief has broken to only a 50/50 endorsement, if that. If the minimum is set above the average, you will have excess supply of workers, the demand will be less than the supply and as a result there will be unemployment. Sadly, governments never seem to take human behaviour into account. It should be no surprise that hours worked drops as the price goes up. It’s basic economics. But another effect apparently is that safety rates drop. I’m not sure why this should be but it is a fact borne out by empirical evidence. And another obvious fact is that higher minimum wages lead to an increase in grocery prices. If you have to ask why, you only need to think of the increased costs on the shop floor. Shopkeepers might be prepared to swallow increases in costs for a while but not forever. They require a margin to survive, and if it gets eroded they have to make it back somehow at some point.
So the recent Budget statement increasing the minimum wage in the UK should be seen for what it really is. Virtue signalling with no actual benefits to anyone.
As Mani says “Increases to employer National Insurance and, from April, the minimum wage, have already backfired spectacularly. Employers in sectors which traditionally hand out people’s first jobs – pubs, restaurants and so on – now have little reason to take a chance on a young person.
It makes much more sense to hire someone with experience now that the cost of paying a complete newbie has risen so much.”
It’s not hard to see the logic here.
Some people are still hiring, but businesses in general are not. Individual pubs keep telling us their costs have gone up around £22-25,000 per year which doesn’t sound much, but with all the other pressures the pubs face that is a body blow. Pubs are closing at the fastest rate ever. In case you haven’t noticed the number of young people out of work has risen most of all the demographics – and that includes graduates. I’m glad to say (in a way) that young people are starting to vote with their feet about going to university. Most of the time they end up with a huge debt that never gets repaid and the qualification stands them in no good stead. This is quite obviously a recipe for disaster and longer term a real barrier to growth. It’s all very well saying that it means there is a pool of labour available, but that pool is largely useless to businesses. The old joke about what do you say to a graduate (“ Big Mac please”) no longer holds good as what even McDonald’s wants is people with experience.
At this point, there is no path for them to get it.
