Britain’s minimum wage at twenty
* The introduction, just over twenty years ago, of the UK’s National Minimum Wage (NMW) counts as one of the most significant policy innovations of the period. As it enters its 21st year we assess whether Britain’s NMW has achieved its aims and examine its prospects.
* Supporters of the NMW saw it easing poverty and, in doing so, reducing the cost to the exchequer of in-work benefits. There were hopes too that a minimum wage would encourage employers to invest more and increase spending on training, so boosting productivity. Perhaps most daunting was balancing higher pay for low-income workers with preserving jobs.
* The overall verdict for Britain’s NMW is positive. It is a sign of its success that the Conservatives, who opposed it in opposition, embraced it in government and have raised it substantially. The renamed National Living Wage (NLW) has become an established feature of the UK economy.
* On the most important count, incomes and jobs, the policy scores highly.
* Since 1999 the main rate has risen from £3.60 to £8.21 per hour, an increase of 127%, far faster than growth in average earnings of about 75%. The UK minimum wage has risen faster than in any rich country other than New Zealand.
* More rapid income growth for those on low pay has helped narrow income inequality. Today the NLW is equivalent to 60% of the median wage, up from 45% in 1999. It may seem paradoxical that the introduction of a minimum wage, and subsequent sharp increases in the rate, should coincide with growing concern about inequality. In fact on the UK’s official measure, income inequality has fallen since the introduction of the NMW. (Income inequality has risen in many other countries in recent years, but not in the UK. Talk about inequality in the UK often relates to the near stagnation of disposable incomes for some groups, rising wealth inequality and the rapid growth of incomes for those on the very highest incomes.)
* The other effect of raising the NLW more rapidly than average earnings is that its coverage has widened. Two million workers, or 7% of all jobs receive the NLW today, up from 830,000 or 3.4% of all jobs, 20 years ago.
* Substantial increases in the minimum wage appear to have had little measurable effect on job opportunities. The introduction of the minimum wage, and rapid growth in its rate, have coincided with a boom in employment. The total number of jobs in the UK has risen by 20% since 1999, faster than in the US, while the unemployment rate has dropped to a 45-year low. With the exception of agriculture, employment in sectors with heavy exposure to the minimum wage have continued to grow. Employment in accommodation and food services, the sector with the highest proportion of NLW workers, has risen by one-third in the last 20 years.
* What of the hope that the NLW would reduce government spending on benefits? It has delivered here too, though that has been a mixed blessing for those on low pay. As incomes have risen those on low pay have paid more in tax and have lost benefits. In addition as part of the squeeze on welfare spending some benefits and tax allowances have been reduced. Such factors mean that take home pay for those on low incomes has risen more slowly than the NLW.
* What of the final aim, that the NLW would encourage companies to invest more, and boost training, to raise productivity?
* This hope has not been realised. Jobs have been preserved, but not by raising productivity, which has almost flat-lined in the last ten years. Increases in the NLW have not, in general, financed themselves through better productivity. Rather employers have found the money by accepting lower profits, squeezing pay grade differentials, raising prices and reducing non-wage benefits, bonuses and overtime premiums. Profits seem to have borne the brunt of the adjustment, a conclusion echoed by the Low Pay Commission which administers and sets the NLW. The Federation of Small Businesses reports that 70% of small businesses financed April’s rise in the NLW through reduced profits.
* So, with the exception of productivity the NLW has largely delivered on expectations. As for the future the rapid upward trajectory of the NLW seems likely to continue. The chancellor, Philip Hammond, said in March that he had the “ultimate objective of ending low pay”. On the internationally accepted measure of low pay this would take the NLW from 60% to 66% of median earnings, the highest in the rich world. The Labour Party wants to go further, and is committed to a £10 minimum wage.
* At 66% of median pay around 20% of all UK employees would be on the NLW. In the most affected sector, hotels and restaurants, over 40% of employees would be covered. Almost a third of employees in wholesale and retail would be on the NLW.
* The architects of Britain’s minimum wage recognised the risks it might pose to jobs. Such fears have not been realised but, as the UK minimum wage heads higher, the risks increase. When it comes to setting the rate of the NLW the past is not necessarily a good guide to the future.
OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week almost unchanged at 7,509.
Economics and business
* China’s economy grew by 6.2% in the second quarter, its lowest rate of growth since at least 1992. Trade tensions and structural factors have weighed on growth
* The Chinese government announced it would no longer prop up failing state-owned enterprises (SOEs)
* China’s current account surplus – for which it has been heavily criticised in the past – shrank significantly in 2018 to near zero, according to the IMF, in part due to the trade war with the US but also as China buys more foreign services, particularly tourism
* Russia indicated it is willing to work with Europe on its INSTEX payment system to bypass US sanctions
* US retail sales came in stronger than expected, with surveys of business sentiment also sounding a positive note for the US economy
* US treasury secretary Steve Mnuchin warned that the US government risks another shutdown in September if the debt ceiling is not raised
* Mr Mnuchin also dampened speculation the US would intervene in markets to weaken the dollar, ruling it out “as of now”
* The chief economist of the OECD Laurence Boone has called for further fiscal stimulus to support growth in Europe
* UK earnings growth accelerated to 3.6% in May compared to a year earlier, the fastest rate since 2008
* House prices in London fell 4.4% in the year to May, the sharpest fall since 2009
* Tensions in the Strait of Hormuz are running high following Iran’s seizure of a UK flagged vessel and the US navy saying it had shot down an Iranian drone
* UK inflation came in on target at 2.0% in June
* UK retail sales rose 3.8% in June on the same month a year earlier, beating expectations
* UK MPs called on the UK Statistics Authority to revise the RPI inflation index calculation which tends to overstate inflation. The index is used to calculate interest on student loans and sets increases in train fares and some pensions
* The UK water regulator Ofwat has ordered cuts to water bills and announced new targets for water companies on pollution and leakage
* The UK broadcasters, BBC and ITV, announced the UK launch of joint streaming service BritBox to compete with established streaming rivals
Brexit and European politics
* The voting among Conservative Party members to choose a replacement for Theresa May as British prime minister has drawn to a close. Boris Johnson is the clear favourite in betting markets with an implied probability of 97%, according to Oddschecker; the winner will be announced tomorrow
* Sterling briefly sold off during last week over concerns of a no-deal Brexit driven by uncompromising statements by leadership candidates Jeremy Hunt and Boris Johnson
* UK chancellor Philip Hammond said he would resign if Boris Johnson became PM
* UK MPs voted for measures that make it more difficult to suspend parliament and force a no-deal Brexit, underlining the opposition many MPs have to leaving the EU without a deal
* The UK national development bank is to provide more funding to small businesses to replace EU funding after Brexit
* Coalition talks collapsed in Spain, raising the probability of an election this year
* Former German defence minister Ursula von der Leyen was confirmed as president of the European Commission in a secret ballot
* Ms von der Leyen campaigned for a “green new deal”, including a carbon border tax and strict emission reduction targets, within her first 100 days
And finally… a Colombian man was arrested at Barcelona airport after trying to smuggle half a kilo of cocaine into Spain under his wig. The man who arrived from Bogotá caught the attention of the authorities when he appeared very nervous. The officers were also struck by the unusual size and height of his wig. When they asked him to remove the wig the officers found a packet containing around £27,000 of cocaine glued to his head – on a wig and a prayer