Can we have our (larger) piece of cake and eat it?

Vince Cable, the Business Secretary, announced on Wednesday that the National Minimum Wage will rise to £6.50 from the autumn. This is not bad news for those on the lowest pay; neither is it good news. They will see a 3% pay increase. But, it is far from an inflation buster – after all, the OBR predicted RPI inflation at 2.9% for 2014; RPI inflation currently stands at 2.8%.

Which all rather poses the question: what should the strategy be for regulating wages? Happy coincidence then that the Resolution Foundation published yesterday a report on reforming the remit of the Low Pay Commission (LPC) and the role of the National Minimum Wage (NMW).

The wide-ranging report – authored by a committee of eminent economists and experts – puts forward many recommendations for how the LPC and the NMW could be reformed to be a more ambitious influence on pay, living standards and the economy more generally. The report advocates that over time the wage-floor should be raised to 60 per cent of the median wage. It also argues that the Government should be more long-term and strategic, for instance by targeting a reduction in the share of low pay from 21 to 17 per cent (about 1 million people) ‘a challenge that is ambitious but not unachievable’. A further proposal is for the LPC to mirror much more the independent advisory status of the OBR, such as by publishing guidance for pay in different sectors.

Trying to heed the positive lessons of its past, whilst emboldening the LPC to be more forceful in tackling low pay in the future, the proposals could be summarised as ‘more ambition but with similar caution’. This results in a very balanced and thoughtful report. And, like all considered exercises it poses almost as many questions as it answers:

If it’s not broken why mend it?

The evidence suggests that the LPC has done a very good job of achieving a meaningful if modest increase in the lowest wages over time, without triggering a negative effect on unemployment. But, striking this balance was the purpose of the LPC. It does not follow that if it is tasked with being more ambitious about increasing the rate of the regulated wage that higher unemployment will not be the consequence. Intuitively, the story of the LPC could just as much suggest the opposite: carry on cautiously.

Are we getting a double lock on wages?

The Government has established a triple lock on state pensions: they must rise by inflation, wages or 2.5%, whichever is the highest. Already, there is real concern that this is tying the hands of Ministers as they seek to reduce the deficit in the context of an ageing population. But, there is a real danger that we repeat the exercise for wages. While the report recommends that we should focus on increasing the wage floor relative to the median, it also strongly encourages the LPC to advise on how the NMW can recover the real-terms value it lost during the recession. It also suggests that ‘setting out a recovery path of this kind should also become standard practice whenever the NMW falls in real terms’. There is some sense in linking the NMW to the median wages. But, it is unclear to me why we should try to ensure that it never loses any value in real terms. It appears even less consistent to aim to do both.

Should we be worried about those in low pay or those stuck there?

The principal problem of low pay is arguably one of flow. An economy can always expect at any one time a proportion of its workers in low pay – for instance, some will be entering or re-entering the job market and building up skills and experience. But, as the report acknowledges, there are large numbers caught in low pay for significant periods of time and this is something the LPC should worry about. If this is the fundamental problem, then should the principal focus perhaps be those who are stuck rather than the proportion in low pay at any one time?

Is one minimum wage enough?

Having a national benchmark for a regulated wage is hugely problematic. London is often noted as an exception and an exception worthy of different measures – the Resolution Foundation recommends that the LPC moves immediately to publish a special ‘reference rate’ for London.

London is an exception but only by degree. Let’s take the standard definition of low pay: the proportion of workers paid below two thirds of the median wage. Across the country, the proportion is 21%. But, the percentage in London is 11%, in the South East 18%; and in Wales, the East Midlands, Yorkshire and Humber and the West Midlands 25%. So, the difference between the South East and much of the rest of the country (7%) is as large as the difference between London and the South East (7%). So, why stop at London?

Are wages the target to aim at in any case?

It remains unclear whether setting a target on wage policy is the right goal on which to focus. Wages are a symptom of other underlying factors. Targeting a reduction in the numbers on low pay (on whatever relative measure) isn’t necessarily the most direct way of achieving it. As the paper notes in passing, it is the underlying productivity problem that makes up a significant chunk of the low pay problem. So, why shouldn’t the government set a target on productivity rather than on low pay?


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