The political parties are starting to set out their dividing lines over how the solve the cost of living “crisis”, brought into stark relief in recent years by high inflation accompanied by stagnant wage growth. This week it’s the turn of the Labour Party. Ed Miliband – aiming for an “economy that works for working people” – wants to see minimum wage rises.
This is certainly one possible solution, but it raises a number of important questions.
1) Won’t this just increase unemployment?
The most obvious counter-argument to increasing the minimum wage is the unemployment problem. Would a rise in the minimum wage simply discourage firms from hiring? This was a key concern when the minimum wage first came in, in 1999. The Low Pay Commission specifically takes into account the potential for negative effects on unemployment in setting the minimum wage.
Going against the Low Pay Commission’s recommendations – or indeed changing their remit – could risk higher unemployment, and higher costs for the state. And although the economy is starting to show signs of growth, institutions like the Bank of England aren’t expecting unemployment to come down to even 7% by the time of the next election. This suggests a need to tread carefully, if at all. From this perspective, imposing any increase on just some firms, rather than all, might be more sensible than an economy-wide approach.
2) What firms should have to pay higher wages?
Labour has suggested that some high-earning sectors such as finance, construction and computing, could be required to pay a higher minimum wage. The idea is that firms in these sectors are likely to be able to cope with the increased costs. Over time, as unemployment falls, it is likely that firms outside the sectors enjoying additional regulation will also have to pay higher wages to attract workers.
Some evidence suggests that increasing minimum wages generally could even be a good thing as it encourages firms to invest in increasing the productivity of their workers. Introducing a higher wage for some firms could be a way of transitioning to a higher economy-wide wage a few years later. But in the meantime, even sectors that are high-earning on average will still contain many smaller firms who may be less able to bear the costs. And, if the economy is still on the mend by the time of the next parliament, do we want to hobble some of our better performing sectors?
3) How will it be policed?
Ed Miliband has already spoken about increasing the fine for not paying the minimum wage – successful prosecutions recently have been thin on the ground. But making the system even more complex could make it even harder to police. For example, what happens when firms in the finance sector outsource some functions to sectors outside the higher minimum wage fence?
Very clear definitions of sectors will be needed if Labour is to take a sectoral approach to the minimum wage. Meanwhile, workers may find it lot harder to work out exactly what their legal wage should be – especially if all of this is also accompanied by voluntary “living wage zones” – an idea that Rachel Reeves has recently been looking at.
In some ways, “crisis” is a bit of a misnomer, suggesting as it does a point in time of intense difficulty. The high costs that are contributing to the cost of living have been problematic for some time. High costs of housing and childcare, for example, aren’t especially new. Part of the solution has to involve making markets like housing, childcare and energy deliver better value to the consumer – as all parties are beginning to realise.
Getting policies right in these areas could have huge benefits – and avoid the risk that increasing wages further increases costs in the economy. But of course, designing policy solutions to cope with the multiple causes of the cost of living crisis is a much harder task than just setting wages.