Why I Would Abolish the UK's National Minimum Wage
The UK national minimum wage (NMW) was introduced by the Labor government in 1999, during its first term. At the time, business groups and the Conservative party opposed it, citing concerns that it would increase unemployment. However, initially its impacts appeared to be minimal and, as a result, the NMW has been fairly uncontroversial until now.
This week, as the NMW increases to £4.98 for 18-20 year olds (from £4.92) and to £6.08 for those over 21 (from £5.93), the Low Pay Commission has announced that it will conduct a review of the impact of the NMW on the youth unemployment. This follows comments from business that they are not prepared to hire young people given the requirement to pay them the NMW.
Now is the time to scrap the NMW. Here's why I would do it:
- Classical economic theory has always suggested that increasing the cost of low-paid workers will reduce the demand for them, thereby increasing unemployment. While this classical theory has been challenged by some economists, it's intuitive. One can imagine that, while a NMW might not cause too much labor market damage during boom periods when labor supply is tight, it may be a very different picture during recession.
- The concept of a 'national' minimum wage totally fails to take account of regional cost and labor market supply/demand variations. The NMW may be simultaneously affordable in London but princely in other parts of the country. A 2003 study conducted by the London Mayor estimated that London's cost of living was 17% higher than Edinburgh and 23% higher than Manchester. It's wrong that all three cities should have identical minimum wages.
- Recently, we've had calls for businesses to pay a 'living wage' of £8.30ph in London and £7.20ph outside London. If one of the justifications of the NMW is that it provides a worker with enough to live on then, according to the Living Wage Foundation at least, it's not doing the job. However, the very existence of the NMW provides a target figure that may suppress the level of wages paid to some low-skilled workers.
Abolishing the NMW would allow many young people to get that first foothold in employment they so badly need. We should get rid of it now, before we lose another year of workers to soul-destroying unemployment.