No time to freeze the minimum wage: four reasons why

07 Jan 2009, by Adam Lent Guest in Economics, Labour market

I mentioned before how pressure for a freezing of the minimum wage has grown in recent days. Here’s four reasons why this is a bad idea.

1. The argument from business associations is that 2009 is going to a terrible year economically and to place extra costs on business at this time will create greater job loss and insolvency. But the Low Pay Commission (the body that recommends the minimum wage rate to the Government) has actually already set a minimum wage rate for 2009 – it is £5.73 per hour and it came into force in October 2008 and will run to October 2009. The current LPC deliberations will lead to a recommendation designed to run from October 2009 to October 2010. So the real issue is how bad things will or won’t be throughout 2010 not 2009. This is, of course, very difficult to know but even the gloomiest predictions expect some pick-up in growth by 2010. In effect, those who are arguing for a freeze are saying that just as the economy starts to grow and wage settlements are likely to ease, the lowest paid should still suffer.

2. Freezing the minimum wage is a horribly blunt approach. The Low Pay Commission takes vast amounts of evidence, conducts a great deal of research and deliberates in detail before deciding its rate recommendation. It has a complex trade off to make between social justice, what businesses can actually afford (not what they say they can afford), the likely impact of various changes to the rate on unemployment for a variety of groups in the labour market, the impact on different types and size of business, and the impact on the wider economy. Into this mix they have to throw issues around enforcement of minimum wage rights and the fact that there are different rates and arrangements for different age ranges, apprentices and certain types of atypical work. To simply say “things are bad, let’s freeze the rate” is absurdly simplistic against the background of such complex trade-offs.

3. In this vein, just as raising the rate too high can lead to unemployment and insolvencies, so setting it too low will have the same effect. Minimum wage earners (of which there are about one million) are also consumers as well as employees. Importantly, given the recessionary problems, they also spend rather than save and they also spend a lot of money in the very sectors where there tends to be concentrations of minimum wage earners. If their wages are set too low, then their spending power will be constrained which will lead to declining demand which will in turn lead to greater insolvency and unemployment. On the other hand, set the rate at the right level and the rise in October 2009 will act as an economic stimulus.

4. I’ve heard it said that because inflation will drop next year, then a freeze would in effect not be that bad for minimum wage earners. This is nonsense. As pointed out above, the minimum wage is being set now for October 2009 to October 2010 – the rate of inflation over this period is unclear but it is very unlikely the figure over this twelve months will be below 0%. In effect, a freeze therefore means a real terms pay cut for one million people already struggling on a very low wage.