The National Living Wage

First posted on September 2 on www.con4lib.com 

George Osborne’s National Living Wage might be popular politically, but in practice it is proving to be as unreasonable as expected.

With businesses being forced to pay workers aged over 25 a minimum of £7.20 an hour from April next year, and £9 by 2020, it is no surprise that statements of deep concerns by industries in which low-paid staff make up over half of company costs are beginning to make headlines.

As has often been expressed, care homes are increasingly facing a “catastrophic collapse” in number. This mounting threat has been exacerbated by compulsory minimum wages, through the mechanism that is…basic economics. With present, warrantable levels of funding and charges, costs of care will exceed income. This is surely alarming for the hundreds of thousands of Britons who rely on the industry, but certainly not an issue confined to the care sector.

Indeed, many sectors employing low-skilled labour must begin to reconsider levels of employment whenever the minimum wage level that the government deems to be ‘fair’ exceeds the marginal product of the unit of labour – each individual worker’s value, that is. Automation is just one response to rising labour costs, and surely an understandable one.

Innovation and higher levels of capital investment are, for example, already occurring prematurely in the United States. Minimum wage laws in the U.S. are decentralised to the state and city level, thus individual cases can be judged by their outcomes. As the Washington Post recently reported, the fact that around 30 percent of cost in the restaurant industry is comprised of salaries means that robots and advanced capital have become more attractive as cost-competitive alternatives to labour, as its costs rise. This is particularly the case for areas in which the federal minimum wage of $7.25 is undergoing a dramatic doubling to $15, despite a growth in productivity of a meagre 0.3% per year. As this instance illustrates, jobs are threatened by the spur that wage floors provide to lean towards capital as a means of cost minimisation and performance optimisation.

In consideration of the National Living Wage proponents’ argument, it is very well arguing that everyone should receive an annual income they can live on. Of course they should. Unfortunately, the government’s attachment of an hourly rate to 60% of the median income appears to be a gimmick that ignores the huge distortion of the labour market and countless negative side effects that would not occur following other means of satisfying income needs.

The OBR’s estimate that this National Living Wage will cost 60,000 jobs is surely something not to be ignored. That is 60,000 people. Even worse, the Low Pay Commission last week warned that 60,000 was in fact a conservative estimate of resulting job losses. Inevitably, low-skilled workers are priced out of a job when their equilibrium wage rate, the point at which they would be competitive and willing to work at, is effectively forbidden by law. Frequently, it means being replaced by fewer but higher-skilled workers. How interesting it would be to hear proponents of high minimum wages defend unemployment as preferable to a £5 hourly wage.

The simple truth is that Osborne’s moment of political populism is ignorant to economics and harsh to the realities of low-skilled work. Other mechanisms of boosting insufficient annual incomes should be considered by the government; Simply placing the burden on businesses to pay an often unsustainable wage artificially set above the market rate is, yes, politically clever, but nonetheless ill-conceived and surely not without adverse effect.

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