Should we scrap the minimum wage?

by Cliff D'Arcy on 04 June 2012  |  40 comments
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With business keen to relax labour laws, would ditching the minimum wage help the UK?

To ensure that young workers get a fair wage and don't get exploited by dodgy employers, the UK has a National Minimum Wage (NMW). Introduced on 1 April 1999, the NMW was a cornerstone of New Labour’s first term in office. 

When it was introduced, the NMW immediately raised the pay of 1.9 million low-paid Brits, even though the highest rate was just £3.60 an hour. Over the past 13 years, this 'wage floor' has increased and evolved. Since 1 October 2011, these are the four rates for the NMW: 

* Based on 40 hours a week, 52 weeks a year 

The third and fourth columns of my table show how the NMW works out on a weekly and yearly basis, based on a 40-hour working week. Even the top rate is hardly a living wage, because £6.08 times 40 times 52 is £12,646. This is under half of the UK's average salary for full-time workers, which is around £26,000 a year.

Job killer? 

Before the minimum wage was introduced, employers and business groups warned that it would be an 'unnecessary tax on business'. They argued that, by pushing up wages for low-skilled and casual labour, the NMW discourages businesses from taking on new staff, especially young adults looking to break into the world of work. 

While some economists argued that the introduction of the NMW would cost up to 80,000 jobs in its first three years, the government claimed that it would have little effect on overall employment. History shows that the latter argument seemed to win through, as employment expanded strongly during the boom years of the Noughties. 

Then again, times are much tougher today than they were before our bubble burst five years ago. 

Indeed at the end of March, UK unemployment stood at nearly 2.63 million or 8.2% of the workforce. Even worse, the unemployment rate for 16 to 24 year olds is almost three times higher at 21.9%. In other words, almost two out of nine young adults who want to work are jobless.

Shaking up the job market 

In an effort to improve the job market, the government commissioned the Beecroft Report last year, a wide-ranging review of employment law carried out by venture capitalist and Conservative donor Adrian Beecroft. 

To encourage business to recruit more staff, Beecroft made 23 recommendations, such as new legislation that would: 

-  make it easier for firms to sack under-performing workers;

-  shorter periods of consultation for compulsory redundancies

-  a cap on the compensation paid to workers who win discriminatory dismissal claims; and

-  reform of the TUPE -- Transfer of Undertakings (Protection of Employment) Regulations -- when businesses are taken over and workers are transferred to the new owner. 

With the UK economy back in recession, the coalition government is desperate to introduce measures to stimulate growth. By making the labour market more flexible through easier 'hiring and firing', some ministers believe that employers would gain confidence and begin to enlarge their UK workforces.

Scrapping the NMW 

Though Beecroft has not argued for the abolition of the minimum wage, some right-wingers would like to go further by scrapping the NMW and return to a free market for pay. The problem with this approach is that it’s far from clear that ditching the NMW would leave Britain better off as a whole. 

On one side of the political spectrum, Labour and trade unions argue that the NMW is a good thing for Britain. They claim that it reduces poverty (especially outside of the affluent South East), increases individual productivity, improves incentives to work, and reduces reliance on state benefits. 

In contrast, some right-wingers and business groups argue that the NMW acts as a brake on growth, prices workers out of the market, and pushes up both unemployment and the cost of living. Also, many people earning the NMW are second-income or part-time earners, such as the spouse of a full-time breadwinner. Hence, in relative terms, the NMW is less valuable to these workers. 

On one hand, ditching the NMW might reduce unemployment, as businesses take on more low-paid staff. Conversely, lowering the entry level for wages could create lasting reductions in incomes higher up the employment ladder. 

What do you think? 

On balance, I feel that scrapping the National Minimum Wage would be a bad move, not least because it would most likely create a 'race to the bottom'. By trimming wages for unskilled and low-skilled jobs, pay rates could be depressed across the board at a time when wage growth is already low in historical terms. 

Of course, I might well be wrong, so I'd like to hear your views -- as a worker or employer -- on the minimum wage. For example, have you benefited from the NMW? Does it increase 'black market' (cash in hand) employment? Should the NMW be higher in London and the South East? Would reducing it cut inflation or simply push up company profits? 

Please leave your thoughts in the comments box below! 

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