The case for lowering the minimum wage

What do you call it when you deliberately, with malice aforethought, screw up the economy? Ah, yes, that’s government, isn’t it. What do we call the same process when this is carried out against the shrieks of horrified economists and even against the advice of the very report you commissioned to justify it? That’s politics.

Which is where we are with the minimum wage and youth unemployment. 

The basic argument about a low minimum wage is that it doesn’t matter very much. Very few people get paid very low wages so insisting they get paid more doesn’t make much difference to anything. When we raised the — rather low — minimum wage in 2004 it might have killed 13,000 jobs. Bit of a blow for 13,000 people but what’s that when set against New Labour’s ability to preen? 

Similarly, the basic argument about a high minimum wage is that when it bites on lots of people then the effects will be large. Lots of jobs won’t exist because the wages that must be paid to get them done will make it not worth having those jobs done. Or, more pertinently to today’s argument, lots of people won’t get jobs because their labour is now not worth the price that must be paid for it.

That lots of people will be concentrated among the young of course. The untrained, untried, no one really knows what their labour is worth folk.

None of the above is in the least controversial in any rational form of economics. The only arguments, ever, are about what is the number which is high for a wage and what is the cost in forgone jobs which is, equally, too high? While theory is all very well in something as complex as an economy the only real way to find out is suck it and see. At which point: 

In October to December 2024:

• • there were 642,000 young people aged 16 to 24 who were unemployed, 136,000 more than the previous year. The unemployment rate for young people was 14.8%, up from 11.9% from the year before.
  • there were 3.69 million young people aged 16 to 24 in employment, 32,000 fewer than the previous year. The employment rate for young people was 50.1%, down from 51.5% the year before.

Recall our basics. We’ll see the effects of a minimum wage that is too high in the employment prospects of the young, at which point seeing significant youth unemployment problems is a decent indication that the minimum wage is too high.

Thus we should conclude that the minimum wage is too high.

Some are not satisfied with the market-led approach of suck it and see — and that really is the market-led approach too. Try many things, even all things, then do more of what works and less of what doesn’t. It’s not an intellectually complex idea to be honest. But for those not satisfied, why not commission a global expert to report on the matter? This is what the British Government did, with Arindrajit Dube. An expert decidedly favourable to higher minimum wages in and of themselves too. His report is here. 

Dube’s conclusion is that somewhere in the 55 to 60 per cent of median wage level is about right. That’s where the damage to employment prospects becomes large enough to outweigh the loveliness of all those people gaining higher wages. 

But, as there always is, there’s a catch here. The wage we take the median of should be the blended wage — that of full and part timers, weighted and blended together. Part timers tend to be paid less than full so the blended median is significantly lower than for full time only. We can find that in the ASHE Survey. For full timers only, the median is 18.72, for blended, 17.09. With the current minimum wage of £11.44 (before the coming rise) this is 61 per cent of the former and 67 per cent of the latter — into or above that danger territory we’ve all been warned about. Using the about-to-be minimum of £12.21 we’re at 65 per cent and 71 per cent. That is, well over the rate at which the best science we have got tells us that the damage is greater than the benefit — or, to return to our suck it and see approach, where we’d expect to find substantial youth unemployment appearing. And aren’t we seeing just that?  

So what is the government actually doing about this? 

We expect this increase to mean we reach the Government’s target of two-thirds of median hourly earnings, for workers aged 21 and over. This is a significant achievement of an ambitious target. The NLW has risen far quicker than before the target was introduced and become one of the highest minimum wages in the world. 

The answer is to do more of what we have proven, in both theory and practice, is not worth doing. A highest minimum wage in the world allows our governors to preen and the young to be unemployed. Well done everyone.

So, what do we call it when you deliberately, with malice forethought, screw up the economy and ignore the shrieks and reports of your subject specific advisors? That’s government and politics. Aren’t we the lucky ones.