Friday, January 17, 2014

Minimum Wage & The Proposed Increase

Just 3 years ago I would have told you that the minimum wage is a bad policy.  My belief was based more on theory of neo-classical economics, the ideas of supply and demand – the higher the price for wages, the lower the demand and hence higher the unemployment.  Good for those with a job – bad for those wanting a job.

I do like to challenge my own beliefs, and reading conclusions from various studies, the outcome of minimum wages in the UK and across the world is not as conclusive as I expected.

There is no definitive answer, like in much of economics (which is why economics is so fascinating a subject).  The thinking does seem to be that a minimum wage does not have a negative effect on unemployment, at least to a value, estimated to be at 50% of the median wage.

However there are some interesting facts:

1. Youth unemployment has risen consistently since the early 2000’s, not long after the minimum wage was brought in (remember much of this year the economy was growing strongly as Gordon Brown had eliminated “Tory Boom & Bust”.  Replacing it of course with “Labour’s banker’s boom and worst ever bust in living memory”…forgive me for the reminder, I will try to make it my only one).

2. General unemployment is stubbornly high in poorer and more traditional working class areas.

3. Inequality went up during the last government, not down.  Did the minimum wage actually redistribute wealth as it was supposed to?

The median wage in the UK is around £26,000.00.  Assuming an average of 37.5 hours work a week gives an hourly wage of £13.33.  50% of the median wage is therefore £6.67.

The government proposal is to increase the minimum wage to £7.00 an hour.  This is not too far over what is the estimated safe minimum wage in terms of not having a negative effect on unemployment.

But the UK is not at all equal.

The median wage in London and the south-east is much higher than in the majority of the rest of the country.  Housing costs are much lower in many parts of the country, generally where unemployment is higher.

Britain is too diverse.  We need regional minimum wages.

My proposal is for an even higher minimum wage for London – say £7.50 or even £8.00.  Keep the recommended proposed increase to £7.00 in areas of the south-east with very high housing costs, and anywhere else in the country that is appropriate.

But for the rest of the country, particularly those post-industrial areas which really do struggle with high unemployment and all the difficulties this brings, the minimum wage must NOT rise.  In fact, it should fall (perhaps this would need some kind of protection for current workers?).

My thinking behind this is to rebalance the economy away from London and the south-east, giving employers a solid reason to move work or open new factories/offices, etc in areas of high unemployment.  A knock-on effect could also be to reduce the pressure on housing in London and the south-east.

Of course this policy should be reviewed periodically because if it worked, then eventually, probably over the course of a couple of decades, regional inequality and unemployment should reduce.

A lot of people will disagree with me but I believe that George Osborne does have far more empathy for those of lesser means that most people give him credit for and actually grasps, as much as someone with a lot of inherited wealth can (though he is not as rich as Russell Brand is), the daily struggle of many.

This government has actually done a fair amount for the poorest in society, increasing the tax threshold to £10,000.00 and bringing 2 million out of income tax altogether, not to mention increased employment.  Not to mention a reduction in inequality so far.

I added that it is not the government who decides the minimum wage - that is the role of the Low Pay Commission.  Though it does sound an instruction to do so, to me.

Whether or not you agree with the economics of a rise in the minimum wage, this is wise politics and quite amusing to see the Conservatives encroaching Labour’s natural working class ground, whilst Labour is trying to win over the middle-classes.  Whether the Conservatives will be rewarded with votes from the lower/working classes in 2015 is another matter.

Don’t forget George Osborne will be fighting Boris Johnson for the nomination of next Conservative leader.  Why not follow up rescuing the economy with redistribution if you want to be the next Prime Minister?

I am interested in your thoughts.