Vince increases the minimum wage. It’s the right decision, but we do need to get local about it.

by Stephen Tall on April 15, 2013

This was the Mirror (and many other news outlets) two weeks ago:

Minimum wage cut fears: Fury as Government considers ‘kicking’ low-paid workers

The reality? The Government has accepted the independent Low Pay Commission’s recommendations to increase both the adult and youth National Minimum Wage rates. The BBC reports:

Minimum wage to increase to £6.31

To be clear, the 1.9% increase is below the expected rate of inflation — so this is a real-terms cut. The increase is, however, higher than either public sector workers or those on benefits will receive. The only recommendation of the Low Pay Commission that was rejected was the proposal that the rate of pay for apprentices be frozen; instead they get an increase of 1.1%.

Here’s what Lib Dem business secretary Vince Cable had to say:

The independent Low Pay Commission plays a crucial role in advising the government when setting the National Minimum Wage every year. It balances wages of low paid workers against employment prospects if the rate was set too high.

We are accepting its recommendations for the adult and youth National Minimum Wage rate increases, which I am confident strikes this balance. However, there is worrying evidence that a significant number of employers are not paying apprentices the relevant minimum wage rate.

Apprenticeships are at the heart of our goal to support a stronger economy, and so it is important to continue to make them attractive to young people. Therefore, I am not taking forward the LPC’s recommendation to freeze the apprenticeship rate due to non-compliance, but instead am raising it in line with the youth rates. We are working on a series of tough new measures to ensure we tackle non-compliance issues across the board.

The increases have been attacked by the Institute of Economic Affairs (IEA):

The scale of the rise – a 2 per cent increase, more than 50 per cent higher than current average pay growth – will add considerably to business costs and disincentivise companies from hiring additional staff. There are swathes of jobs that need doing, but in the current economic climate many simply cannot justify a wage of £6.31 per hour.

This assertion is contradicted by the thorough report of the Low Pay Commission:

… although the bite [of the minimum wage] in the low-paying sectors has grown even more than in the economy as a whole since 2007, in 2012 the number of jobs in the low-paying sectors increased faster than the number in the whole economy. Further, generally the employment performance of those groups of workers most affected by the minimum wage – women, older workers, disabled workers, ethnic minorities, and migrants – has been better, since the onset of the recession, than their less affected counterparts. However, there are two groups whose experience has been worse: young people and those with no qualifications.

Our research programme for this report has further extended the literature on the impact of the minimum wage on earnings, employment and hours. Our overall conclusions from this work are that as a result of the minimum wage the lowest paid have received higher pay rises than their peers, and that there remains little evidence of a significant adverse effect of the minimum wage on employment. [my emphasis]

Vince is right: a balance needs to be struck when setting the minimum wage (if you accept, as I do, that one is necessary)… Too high and, yes, it will have a negative impact on jobs. Too low and it’s the tax-payer which picks up the tab, either through paying for tax credits or benefits.

This is one area where there is a clear need for independent expertise able to assess the available evidence and strike that balance. I’m glad the Commission exists and I’m glad the government listened to it.

However, just in case that sentiment strikes too cosy a chord with Lib Dem readers, I think the IEA does have a point when it calls for a localised minimum wage: ‘In its current form, it is a blunt instrument, which takes no regard of the wide variation in labour market conditions around the country.’ This is already recognised by campaigners for the living wage, which distinguishes between London and the rest of the UK. The logic of such a position — acknowledging that pay and the costs of living vary according to where you live — should be extended more widely.

* Stephen Tall is Co-Editor of Liberal Democrat Voice, a Research Associate for the liberal think-tank CentreForum, and also writes at his own site, The Collected Stephen Tall.