Responses to a falling real minimum wage

I've recently looked at the issue of a smaller slice of GDP going to wages, and here are a couple of links and updates on the minimum wage discussion. For those of you who follow this topic, you’ll also perhaps be familiar with the idea of a living wage, which is based around the argument that minimum wages are too low anyway.

If you want to go beyond the links I've put above you might want to turn to this link on the BBC site which brings you up-to-date on the living wage discussion. The Economist, rather bleakly, seems to take the view that UK wages are too low, but firms can’t afford to pay a higher minimum wage (let alone a living wage).

For a decade until 2007 wages rose by 4% year-on-year while prices went up by less than 2%. The low-skilled made ground too. The national minimum wage—a legal pay floor introduced in 1999 at £3.60 per hour—rose in real terms every year (there’s a chart in the article here). Then workers’ position deteriorated. With prices rising about twice as quickly as pay, the basket of goods a British worker could afford started to shrink. Those at the bottom, such as bar staff, cleaners and mechanics, did badly too, as the inflation-adjusted minimum wage started to fall. By the end of this year it will be back to its 2004 level.

Across the vast majority of income distribution, real income has fallen.

It’s a great opportunity for the government’s opposition to attack. Mr Milliband wants to force prices down and wages up. In a speech on November 5th he backed the idea of the living wage, which would lift minimum pay to £7.65 per hour outside London and £8.80 in the capital. KPMG, a consultancy that supports the idea, estimates that 21% of Britain’s 25m workers are paid less than the living wage. For the 891,000 who toil for the minimum wage of £6.31, jumping to £7.65 improves weekly pay by £50. Britain’s low-wage army would be £2,500 a year better off.

Perhaps predictably, The Economist doubts whether Britain’s firms can cope with paying workers up to £2,500 extra per year. In normal times there would be grounds for optimism: cross-country evidence suggests that gradual minimum-wage increases do not push up unemployment. And the planned living wage is still well below Britain’s median pay of around £12 per hour. But these are not normal times. Higher prices in the shops have not translated into profits for Britain’s firms. A host of input costs—from oil and plastics to cereals and meat—have risen. Small firms struggle with borrowing costs; big ones are bolstering balance sheets, not paying big dividends. Firms are not flush: the trade-off between pay and jobs is a real one.

The article finishes with a supply side perspective: Britain needs stronger competition enforcement in cosy markets to lower prices. It needs investment, R&D and better education to lift productivity. If Britain’s political parties were to prioritise these, the paper argues, wages would rise.

Thought-provoking economist Ha-Joon Chang rips into this argument here in the Guardian, which pulls no punches. He says that Milliband is spot on, and the traditional view (expressed by The Economist) “epitomises everything that's wrong with British business”. He says that "companies with market power are perfectly capable of paying their workers more by charging customers more, if they so wanted – except that they don't. Many are busy using the profits from overcharging customers to give big pay rises to their CEOs and give away money to their shareholders”. You really should read the whole article, which is a terrific attack. Interestingly, even Chang comes round to some similar conclusions to The Economist; we desperately need higher productivity built on better training education and business investment for a long term solution to the low wage problem.