The party conferences this year have taken place against a backdrop of a growing economy but increasing concern about low wages and reducing standards of living for many.
Today’s increase in the National Minimum Wage by 12p (about 2%), then, is timely. And it offers an opportunity to assess the policies of the different political parties towards boosting the incomes of those on low wages.
The Coalition parties have thus far focused on increasing the personal allowance for basic rate taxpayers. By the election, those earning £10,000 will pay no income tax at all. The Lib Dem conference pledge to ensure that no-one on the minimum wage pays income tax is effectively a promise to increase this further to over £11,000. This remains a straightforward if rather blunt measure: those working part time at much higher hourly rates also benefit, and does not provide an incentive for employers to increase the productivity of their workforce.
Increasing wage levels is far more complex and, here, an almost bewildering number of options are emerging.
One option is simply to increase the minimum wage as the economy grows, potentially allowing it to make up for the real terms losses experienced in the last five years. Vince Cable today asked the Low Pay Commission to ‘look at what economic conditions would be needed to allow the national minimum wage to rise in the future by more than current conditions allow.’ But, it is not clear why the Commission would change its mind dramatically on the trade-off it makes between a higher national minimum wage and the risk of unemployment. And would we want to put more weight on higher wages for those in work at the risk of more people being out of work?
The Labour Party has proposed two alternative routes. First, regulating for higher national minimum wages in specific sectors that the government deems could afford the increases. Although there is a precedent in the old Trade Councils, it is extremely unclear how these sectors would be selected and how the wages could be regulated.
If the state were to regulate those sectors already paying more than other sectors (Ed Miliband mentioned banking), then why bother in the first place? If not, then how would the government identify which sectors could and should afford higher wages? Profit levels alone would not tell you whether firms would respond by reducing the numbers of people they employ. Would firms relocate or change their business model and production process with consequences for employment?
Regulating by sector would also be extremely difficult. For instance, should someone who cleans a bank get paid more than someone who cleans a shop?
The picture is confused further by talk of a living wage. The Labour Party has previously proposed offering a financial incentive to firms that pay a living wage. This is at first glance a neat policy – the government could save on its tax credits bill as wages increase and recycle this as an incentive to employers. By boosting pay this could potentially act as an incentive for employers to increase the skills levels of their employees.
However, the application of this policy could also be beset with complexities. In the first place, what would be the level of subsidy that the government would need to offer to incentivise firms to pay their employees more? Due to the way that benefits are withdrawn from individuals as their earnings increase, the government could not expect to save £1 for each £1 it paid out in subsidy.
Second, how would the government know if the higher wages paid by an employer were the result of the policy or simply what the firm would have paid in any case? In short it would be hard to avoid a huge deadweight cost. In addition, there is a danger of firms gaming the policy: employers could reduce wages ahead of the policy coming in order to qualify for the subsidy.
The Conservative Party conference so far has not seen any official announcement made on the minimum wage, although party campaign groups Renewal and Bright Blue have both called for some movement on minimum wage policy.
It will be interesting to see how this debate takes shape and the proposed policies adapt to these challenges as the election nears. But we should also be aware that there is an alternative option that would directly increase prosperity: boosting wages by increasing the skills levels and productivity of the workforce. This would increase economic growth and save the Exchequer on its tax credit bill. And there may be ways of thinking more imaginatively about how these future savings could be deployed to make an upfront investment in skills.