On Minimum Wage Hikes

Policymakers face harsh realities when introducing economic policy: markets are amoral, they care not for good nor bad intentions. In short, having popular politics doesn’t necessarily translate to effective economics.

In the wage market, there is an inherent trade-off between the wage level and the level of unemployment. While the relationship between the two is not firmly established when the minimum wage is at a relatively low level, when it is aggressively raised there is a clearer cost to employment.

The losers in this scenario are always the least productive workers, who are the most economically vulnerable. Minimum wage laws by definition say that employers must discriminate against people who have low skills. It ensures that those who do not possess the skills to justify £x/hr cannot be legally employed.

On average, it is the youngest who have the least skills in the labour market and therefore they disproportionately suffer from the net employment losses. This is clear to anyone who is aware of the youth unemployment rate compared to the overall unemployment rate (generally a greater than 2:1 ratio).

Increasing the minimum wage to £10, as many advocate, would increase costs to employers by over £5,000/year for a full-time employee (including NI contributions, and increased pension costs). Most businesses don’t operate as charities and so the risk of widespread redundancies would be high.

Raising the minimum wage will improve the welfare of those who keep their jobs, however, it will do little good for those who lose them. There is no lack of research on the significant costs of unemployment which will be endured by the unfortunate victims of a reckless minimum wage policy.

The national living wage is doubtless born out of good intentions, but having good intentions is no guarantee of good outcomes.