Introduce a National Minimum Wage with Care to Avoid Edging Out Young Entrants

May Day (or Labour Day) each year always fuels conversations around wages, cost of living, working conditions, etc. On wages, the discussions on minimum wages often come up. Interestingly,  the government has just announced that it plans to introduce a National Minimum Wage (NMW) soon. This is a contentious issue, with profound implications for labour market clearing. Set it too high and it will negatively impact job creation and enterprises’ willingness to retain – and indeed hire – more workers. Set it too low and it’ll defeat the purpose of introducing it in the first place as it won’t have the desired impact.

Consultations with the private sector will be essential in this process. Last year, the Employer’s Federation warned against introducing an ad hoc devised NMW, arguing that “a national minimum wage could distort and create problems to certain sectors which need to be separately considered for fixing minimum wages”. They further elucidated their point of view, which highlights the competing ideas and intentions nicely:

“The issue of the minimum wage is controversial. Many argue that it is too blunt an instrument to be useful and could have detrimental effects on employment, growth and incentives to work, and that it can negatively impact opportunities for lower skilled workers and the youth. Supporters of minimum wages conversely argue that it is an effective instrument in protecting the lower paid and in combatting poverty. Minimum wages are essentially labour market interventions used by governments, either as an instrument of political macroeconomics or as a social tool. Minimum wages represent the lowest levels of pay, established through a minimum wage fixing system, to be paid to workers by virtue of a contract of employment”.

Seeing this ongoing debate I was reminded of a former university professor of mine at UCL who was  a thought leader on the subject of NMW and conducted one of the modules of the Economic Policy Analysis course I was taking. He was an influential academic, who’s research had shaped the UK’s own Pay Commission deliberations on introducing a NMW back in the late 1990s. His research revealed an interesting – rather unorthodox – view on the subject:

Until 1999 many economists and policymakers thought that introducing a National Minimum Wage (NMW) could lead to the loss of up to two million jobs. Professor Stephen Machin (UCL Economics) provided the empirical analysis which demonstrated that this was not the case. He showed, in 1996, that a minimum wage pitched at the ‘right’ level both need not harm employment and, indeed, has the scope to give a significant wage boost to raise the incomes of the poorest workers in the economy.

Regardless of what the rate is, the fact remains that setting a state-mandated NMW is distortionary and restricts the freedom of an employer and an enterprise to enter into a pay negotiation and pay accordingly. The floor is always set. The main concern I have with a NMW is the effect on new entrants to the labour market – young people seeking first time jobs with little to no experience. Employers will now be very reluctant to hire them, at the mandated NMW, and may deny a valuable ‘foot-in-the-door’ training opportunity for unemployed young people.

Interestingly, in the UK case – and particularly due to the work of Prof. Machin – the Low Pay Commission decided not to raise the minimum rate for 18–20 year olds by as much as the adult rate, to avoid risking youth unemployment.

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