The “national living wage” is
economically illiterate

George Osborne’s ‘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 of basic economics; with present, warrantable levels of funding and charges, costs of care will exceed income. This is surely an alarming issue, and certainly not one that is 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 in places where 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 one case clearly portrays, jobs are threatened by the spur that wage floors provide to lean towards capital, simply 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. But how can a government’s attachment of an hourly rate to 60% of the median income possibly amount to anything other than distortion of the labour market?

Minimum-wage earners often consist of young, low-skilled, part-time and secondary earners. Indeed, research regularly concludes that minimum-wage workers are disproportionately young, often part-time working students. One would have to be wearing severely rose-tinted glasses to consider increases in the minimum wage as the most effective poverty reduction tool.

Furthermore, 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. Inevitably, low-skilled workers are priced out of a job when their equilibrium wage rate, the point 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 the 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.