Twenty years on, we can say the national minimum wage experiment was a success. Now to the next challenge

Hamish McRae
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Twenty years on, we can say the national minimum wage experiment was a success. Now to the next challenge

On Monday upwards of two million UK workers get a pay rise. The minimum wage, now called the National Living Wage, will go up from £7.83 to £8.21 an hour. That is for people aged 25 and over, with younger people and apprentices getting rather less.

It is also the 20th anniversary of the UK getting a minimum wage, for while this has long been a common idea in other countries, it was introduced into the UK by the Blair government with the National Minimum Wage Act in 1998.

So, has it worked? A word about the economics, how it has worked here in practice, and what might happen in the future.

For economists there have always been two main concerns about the idea that a government (in the UK advised by an expert panel) should set a minimum wage. One is that it damages job growth and hence increases unemployment; the other is that market wage levels are different in different parts of the country and a single minimum creates distortions.

As far as the first is concerned, the key is to set the minimum at a level that does not destroy jobs. Of course a very low level does not do the task it is supposed to: to make sure that workers are not exploited. But set it too high and jobs do leave, often overseas to countries with lower wage levels generally. The way round this is to look carefully at the economics before setting the wage, something that the UK has tried hard to do.

Having a single wage in a country where the cost of living and overall wages are very different is a harder problem to tackle. The danger is that it means that jobs leave what would otherwise be low-cost areas (because the minimum wage is higher than the market wage) and move to parts of the country where wages would naturally be higher.

The UK is by no means unique in having big regional differentials in pay. The US, France and Italy – though less so Germany – have large differences between their most prosperous regions and those lagging behind. But the UK does have a London issue, for the gap in pay and productivity between the capital and the rest of the country is particularly great.

How have we done? With one proviso, not badly at all. Indeed rather the reverse, for job growth in the UK over the past 20 years has been extraordinarily strong. Far from creating unemployment, the jobless level at 3.9 per cent is the lowest since 1975, half of that of the eurozone. The participation rate – the proportion of people of working age in some sort of job – is the highest ever.

It is possible that it has led to some displacement of jobs towards London and the southeast from other parts of the country, but there are many other factors driving that. It is not at all clear that the minimum wage has been particularly significant. The key problem has been that the minimum wage for the country as a whole is way below what is needed to live on in London.

That has led to the idea of a voluntary living wage, which takes into account national differentials in the cost of living. The Living Wage Foundation has worked to promote the idea, with a London wage currently of £10.55 an hour. Many companies have agreed to pay this, working to improve the ways in which labour is used so as to lift working people’s productivity. A voluntary organisation has, in a sense, fixed one of the problems of a single national wage – or at least it is working to do so.

There are many problems in the UK labour market, some of which have become more evident with fewer numbers of workers arriving from Europe to fill seasonal jobs. But it is hard to argue that the government’s national minimum wage is one, particularly now that the Living Wage Foundation is helping nudge up London rates.

However, it is important to note that we have had a long period of uninterrupted growth. If the labour market weakens, as it may well do if there is a global downturn, then minimum wages may start to reduce employment. There is no evidence yet, but this is one to watch.

That leads to what happens in the future. There is this economic cycle and we have to watch that. But there is another shift, that to self-employment. The whole idea of an hourly wage assumes that people are employed by someone else. If people employ themselves – as 15 per cent of the workforce does – they can pay themselves what they like, or at least what they can afford.

It is true that for some people being self-employed is really disguised employment: for example their money comes from a single source. It is true too that for some this is not a choice: they would rather have a conventional job. Work is in train to define a halfway house between employment and self-employment and we will see how that goes.

But for a majority of the self-employed this is a preferred choice, even if the financial rewards are lower. The question here then is how to create some oversight in commercial contracts to make sure that the playing field between contactor and worker is move level. With the minimum wage on balance a clear success, that is the next challenge.