The importance of the minimum wage

This is the sixth in a series of posts on what sort of welfare state we might want. The first can be found here, the second here, the third here, the fourth here and the fifth here.

Although it is still widely believed  that raising the minimum wage would damage the  economy, a great deal of good work has been carried out in recent years by a range of academic researchers, campaigners and the trade union movement to promote the idea of a living wage in the UK*.

It definitely seems to be an idea whose time has come. The Green Party and Plaid Cymru have signed up to the principle of a ‘living wage’ but (although a number of local authorities, Labour-controlled and otherwise, have done so) the Labour Party has done so only timidly. According to the Labour website their commitment is only ‘to increase the NMW from 54% to 58% of median earnings by 2020 following consultation with business.’

That last phrase – ‘following consultation with business’ – speaks volumes, uncomfortably reminding us of the fudging of the last Labour government which (as I discussed here) found itself caught between the pressures from its constituents to introduce a national minimum wage for the first time and the pressures from neoliberal consultants and business interests to replace existing benefits with tax credits. Gordon Brown, the then Chancellor, ended up with a compromise: introducing a minimum wage which was too low to provide a living wage for many sections of the population, with tax credits used as an income top-up. As the years have gone by, the value of that wage has fallen in terms of its buying power, while the bill for tax credits has grown inexorably. This has of course been in the interests of business, with employers benefiting immensely from being able to pay below-subsistence wages in the knowledge that they will be subsidised by the state.

It will be no surprise, therefore, if the proposed consultations provoke a stream of arguments that raising the minimum wage is not a good idea. The most usual argument put forward by business is that it will ‘destroy jobs’. Employers, will, they say, simply not be able to afford the higher wages and, depending on their size and strength will at best stop recruiting, or, worse, start firing people. Before the introduction of the minimum wage in 1998 the media were flooded with dire warnings along these lines. In the event, no such impacts were detected.

A very thorough recent survey of existing studies by Hristos Doucouliagos and T.D Stanley concluded that ‘with sixty-four studies containing approximately fifteen hundred estimates, we have reason to believe that if there is some adverse employment effect from minimum wage rises, it must be of a small and policy-irrelevant magnitude.’ In other words, research shows that introducing a minimum wage has absolutely no discernible effect on employment whatsoever.

So arguments like these from the employers can be largely discounted. But what about other objections to the idea of a statutory minimum wage coming from other quarters? Two of these arguments deserve special attention.

The first is that statutory minimum wages are incompatible with free collective bargaining. In the past, this argument was typically put forward by trade unions representing workers in well-organised sectors who were able to bargain successfully for above-average wages and, in the process of such bargaining, built strong, class-conscious organisations that could (and sometimes did) use their collective muscle to campaign for broader social benefits for the working class as a whole. It was such voices, above all, that prevented the national minimum wage being placed on the Labour Party’s wish-list until the 1990s, despite some weaker dissenting views from trade unions representing low-paid workers, women and freelance workers. Such views still prevail in a number of European countries where the trade unions remain relatively strong and the coverage of collective agreements broad. Denmark, Finland, Italy and Sweden, for example, only have minimum wage rates set through sectoral collective agreements while Austria has more or less the same system but sets a low minimum wage in sectors where no collective agreements exist. Given that it is always possible for trade unions to negotiate something that is higher than any statutory minimum, it is not always easy to tell to what extent such arguments are driven by instrumental factors – the belief that the only reason people join unions is to get pay increases and a fear that members will become apathetic if they see this role being carried out by non-union organisations.

In any case, such objections are declining in importance. This is partly, perhaps, a reflection of the dwindling of union influence in an economy dominated by anti-union multinational corporations who can use the existence of a global reserve army of labour to bring downward pressure to bear on wages and conditions, and the industrial restructuring that has shrunk manufacturing employment in the West. But it is also a reflection of the growing importance of non-wage issues in the collective bargaining agenda. Across all industries, unions find themselves having to take up issues like job security, health and safety, equality, pensions, protection against casualisation and outsourcing and these are often the reasons people join. In the public sector unions are under growing pressure from their members to campaign against privatisation and austerity. In the creative industries, there are burning concerns about the use of unpaid internships, the ownership of intellectual property and – brought into sharp relief today by the horrific events at Charlie Hebdo – the safety of journalists. With all these other things to worry about, having at least a minimum level of pay guaranteed becomes, one suspects, something of a relief. For trade unions, a minimum wage is a floor below which wages cannot fall. Incorporating it into collective agreements provides a way to ensure that it can stay in place and cannot be removed by government dictat (something which cannot be said about the level of tax credit). Though of course this does not mean that there is not a continuing need to make sure it rises in real terms in line with increases in the cost of living.

Another argument against the minimum wage sometimes heard, including from some people broadly on the left, is that it is incompatible with a basic minimum income, or ‘citizen’s income’. I must say I fail to understand the logic of this argument. Let us suppose that the citizens income (CI) is set a fairly low level, as it undoubtedly would have to be. Then most people will want to work at least part time and many, I would surmise, will want to do so full time for much of their working lives. Their motives for doing so will in most cases include a financial one – they want a higher income so they can improve their standard of living, buy luxuries, take holidays or whatever. They will pay income tax on everything they earn and this income tax, along with the proceeds of other taxes, will be redistributed to pay for public services and, of course, for the CI itself (however it should be emphasised here that the CI will not represent a new cost for the state; it will simply be substituting for benefits, tax credits, tax allowances that people currently claim by different means). The wage and the CI thus bolster each other.

Because there is rather little evidence of how CI actually works in practice there is no way of testing hypotheses that, if the market is left to its own devices, the tendency would be for wages either to rise or to fall. A kind of common sense logic suggests that at the very bottom of the wage spectrum, employers offering unpleasant jobs would have to raise the wages on offer because workers could no longer be forced into them out of desperation. Similarly, we can presume that trade unions representing low paid workers would find their bargaining power with employers strengthened by the fact that CI would offer the equivalent of strike pay in industrial disputes. However it is possible that where jobs are more attractive, people might be prepared to do them for lower rewards. But this is conjecture. In the meanwhile, it seems only prudent not to leave things to the market. I can see no fundamental incompatibility between CI and a statutory minimum wage (though the definition of ‘living’ in ‘living wage’ might have to be adjusted). However I do see a number of other strong arguments for retaining the principle of a statutory minimum wage. These include:

  • bolstering the principle of equal pay for work of equal value;
  • countering gender and other forms of segregation on the labour market;
  • ensuring that vulnerable groups (such as people with learning impairments) can be integrated into work without being exploited;
  • ensuring that migrants who may not yet have been granted the full citizenship that would entitle them to CI are not exploited or used to undercut other workers.

Another big challenge for the minimum wage is how it can be adapted to address the situation of people working online, on crowdsourcing platforms which are unanchored from any national regulatory control. This is something I am currently doing research on but is beyond the scope of this blog post. Watch this space.

*The Living Wage Foundation is a useful source of information on this.

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