For a historic increase in the Minimum Wage, we need a Nixon in China moment….

In 1972, President Nixon went to China to meet Chairman Mao. As well as transforming the future of both nations, the visit also coined the phrase a “Nixon in China moment”. It was such a shock that a US President could visit the Evil Empire of Communism, that the Democratic Senate Leader said “Only a Republican, perhaps only Nixon, could have made this break and gotten away with it”. I believe that we need a dramatic, historic increase in the Minimum Wage in the UK  and I believe that this is the right time to do it. But I also believe that, to update a phrase,  “Only a Conservative, perhaps only a Cameron or an Osborne, could make this break and get away with it”. It is hard for the left to propose a dramatic uplift without being accused of being reckless, anti-business or just, well, socialist. So in the same way that a Conservative-led government has been trusted to cut defence and police spending (but knew that it was less trusted to make cuts in the NHS, so didn’t), the responsibility to do what is right on the Minimum Wage falls to the Conservatives. A lot of the current debate is about whether this year’s annual uplift should be a bit more generous than other years – could we stretch to 50p (8%)extra? But I think this is the wrong question. This should be a bigger, more historical moment. We should close the chapter on the 1998 Minimum Wage that we’ve had for the last 15 years, start a new chapter and reset the minimum at a very different level for the next 15 years. 

Before I nail my colours to the mast on the right level for the Minimum Wage, here are some of the reasons why I believe it can be radically increased without backfiring:

1) Low wage earners are, overwhelmingly, providing services for domestic consumers within the UK economy. They work in shops, cafes and hotels. They cut our hair, they clean our houses, they look after our kids and they care for our elderly.  They are not  in manufacturing, competing on the price of their labour with other countries. What they do has to be done in this country. Nor is it tradable with other countries. If the Minimum Wage increases, it impacts equally on all of an employer’s competitors, so there is no disadvantage. 

2) Raising the lowest wages does not mean that employers simply have to, or will, just cut jobs or working hours to keep the wage bill constant. The evidence is clear that employers find a variety of solutions.  Firstly, they restrain pay growth for their better paid staff. Secondly, they increase prices to consumers. Thirdly, they improve productivity and get more out of each hour that they are paying for. And then they squeeze their profits. Through productivity gains, they either earn more revenue or cut the amount of labour they need. 

3) Increasing low pay has a limited impact on the overall costs of most businesses. In some sectors, very few earn less than the living wage, e.g only 6% in manufacturing. Even in hotels and catering, which is one of the biggests sector for the Minimum Wage, only 17% of jobs are below the living wage and raising the Minimum Wage to the Living Wage would only add 6% to the wage bill. This is the highest impact for any sector. More importantly, labour is only a proportion of all costs, e.g. 25-35% for restaurants. 

4) The current Minimum Wage is a very low baseline. Since it was created 15 years ago, the Minimum Wage has largely eliminated the exploitative wage rates ( in some cases only £1 per hour) which used to exist. A good, but limited job. But it is now just £6.31 and its value in the last few years has declined. It only covers 4% of employees, just 1m people. This rises to 6% in the North East and falls to 2.5% in London. 

5) We do not need to continue with a single National Minimum Wage. This has held down the wage to the lowest common denominator. Concerns about the impact in, say, Sheffield have left the Minimum Wage meaningless in London. We can and should have more than one geographically based level. 

6) The Minimum Wage is an hourly rate, rather than a weekly wage. So it impacts on how many hours an employer wants to buy, rather than forcing a binary decision between hiring someone or not. The same is true for workers deciding how much to work.  Just over a quarter of employees are part-time ( nearly 7m people), but over 5m of these are women. More than 4 out of 10 women work part-time. Hourly rates for part-time workers are much lower than for full-time workers, e.g. the median hourly rate for full-time women is £12.00, but only £8.12 for part-time. So the Minimum Wage hourly rate could be a big deal for part-time workers.

7) There are a number of ways that the Government can compensate employers, if it wants to. Increasing wages helps the Treasury. It reduces the cost of in-work benefits and increases taxes. Moving to the Living Wage would make government nearly £4bn better off. For every £1 increase in low wages, the Government will be 50p better off. (Some say less because they have to pay public sector staff more. But I wouldn’t give into this. The public sector has many of the flexibilities of the private sector to soak it up – e.g. restrain pay growth for the better-off or improve productivity). Government could give some or all of this 50p back to employers. This could be across the board (e.g. via a cut in employer NI contribution). Or it could be highly  targeted. There are only two sectors which are seriously challenged by an increased Minimum Wage – retail/wholesale and hotels/catering. A key cost for both sectors is business rates. This could be reduced by a discounted rate specifically for their type of premises. 

7) This is the right time to do it. Growth and optimism are back in the economy. Jobs are growing. Wages are rising. Those with the broadest shoulders were asked to take the strain of deficit reduction (e.g. reducing child benefit to higher rate taxpayers).  It is equally right that as the country gets richer again the poorest of the hard working families gets a bigger share of the new wealth. 

So if we can safely increase the Minimum Wage a lot, should we do it? The fairness arguments are compelling. The working poor are doing the right thing – they are working. But their incomes have fallen and their fixed costs have risen sharply. Beyond the fairness arguments, there are at least 4 reasons to go big: 

1) Through the welfare system we are guaranteeing minimum incomes to those in-work. If wages are too low, then the cost to the taxpayer is excessive. For example, the median 2 child family with a median single full time wage and a median private sector rent in the South East will get £200 per week in benefits, which is 40% of net income. And this is the median earner! Whilst businesses save on wages, they have to pay taxes to fund these wage subsidies. If there were no in-work benefits, there would be no need for Corporation Tax. We need to rebalance wages and benefits.

2) Low wages where employers don’t have to meet the income expectations of their staff are a recipe for low productivity. Productivity in low wage service sectors is poor and not improving.  The wage subsidies through in-work benefits mean that the incentives for productivity are blunted. If staff cost employers more per hour, employers will more focus on getting more for their money. Whilst in a recession it was tempting to tolerate falling productivity and wages to protect employment, as we grow and want to increase wages it will be disastrous if don’t drive up productivity. Employers paying more is a good thing. It is a route to greater productivity, which is the route to rising wages. 

3) We need more people to work, those who work to work more and all workers to earn more through producing more. The story of of the last decade for low to middle income households is one in which men have brought home less in wages, women have brought in more but not enough to compensate for the men and families have depended on tax credits to balance the books. Lifting the minimum wage won’t be enough on its own. Poorer households will need all adults to work and as many hours as they can. An attractive Minimum Wage can incentivise this. 

4) The Coalition Government (and Labour before that) have introduced a wide range of generous (and expensive) schemes to assist the working poor. This includes tax credits, raising the personal allowance for income tax and Universal Credit. Unfortunately, they are, by necessity, far too complicated for most people (almost everybody) to understand, or remember. By contrast, everyone understands what an hourly wage rate means. One of the Conservative’s strongest slogans is “Making Work Pay”. Through Universal Credit, they are working imaginatively to reduce the marginal tax rates for poorer workers. But given the need to incentivise more people to work more, it is vital that not only does work pay, but that is seen to pay by ordinary people. Shifting the balance in poorer people’s income from benefits to wages can make this difference. Utlimately, a tax-free minimum wage would be the easiest thing to explain. 

So, what should the level be? There is no real evidence of any minimum wages in the world adversely effecting employment levels. But then that shouldn’t be a surprise as the level is always set to avoid any impact. There is a built-in over-caution The problem with that is that we never learn about what’s possible or how labour markets respond. In most markets, things proceed by trial and error. We need to try a more radical level of the Minimum Wage. I propose that we reset the Minimum Wage, after its first 15 years, at the current lower quartile wage rate. That means that 75% of employees earn more than this wage rate. Resetting the rate at this level would mean that a quarter of the workforce would have the protection of the Minimum Wage, compared to just 4% now, and an uplift in their incomes. The rate should be easy to remember (who can recall £6.31). We could announce now the figure for October 2016. If we set one level for London and one for the rest of the country, it could mean an adult Minimum Wage of £8 per hour (at today’s prices, a £1.40 or 20% increase) in most of the country and £10 in London (a £3.40 or 50% increase). These can sound excessive. They are ahead of the Living Wage proposals of £7.80 and £8.70 (at comparable prices). I can hear the reactions now that the London level is absurd.But it is the current London level which is absurd, not £10 in just over 2 years time. We are playing a lot of catch up. And remember that 75% of people earn more than these levels and only 4% of workers would get this full increases. In London the full headline increase would only apply to 1 in 40 workers. Most other people would get only a proportion of this increase, some only a small proportion. But for those who get the largest gains, it is life changing. Someone working full time and getting a £1.50 increase on the minimum wage would have the dignity of earning nearly £2,000 a year more, enough to cover all the utilities bills. Someone who gained just 50p a year would be £900 better enough which might be enough for their energy bill. The fiscal savings are so big at this level that employers in the 2 most affected sectors can be generously compensated with tax reductions and this could be extended more widely. Local authorities deserve some help to fund slightly higher prices in social care.
These new rates could be introduced in October 2016. Thereafter, the annual increases can be restrained or accelerated in the light of the evidence of how the economy responds to the new rates. If the new rates are a bit too high or too low , they can be varied later. 

Coming back to Nixon moments, it is interesting to note what happened to wage rates after his visit to China. In 1974, he resigned over Watergate. In retrospect, the more important history in the making was that 1974 was the first year after World War 2 that US wages declined. It was the beginning of a 40 year bad period for US wages which largely stagnated. Meanwhile, Chinese urban wages have risen 4 fold in the same period. So the biggest impact on low wages in our lifetime came from a Nixon moment. Are we up for another one in the UK?