Should the UK keep ratcheting up its minimum wage?

Guardian columnist Polly Toynbee certainly thinks so. Today's 'open letter' to Paul Myners, the new chair of the UK's Low Pay Commission, is entitled You are now the pay tsar: speak out and embarrass cowardly politicians. Polly rather predictably argues he should "keep pushing the rate up, announcing that intention so business is forewarned".

Is there a limit to how high it can rise before jobs really are lost? All economists agree there is, but none can say when: just suck it and see. Keep pushing upwards until it begins to do more harm than good. But that level would be quite different in each sector and each region - and it hasn't happened yet.

Tim Worstall reminds us of his previous post, Wage Against the Machine, which discusses the recent UK experience:

Why did we not see this effect in the unemployment figures? ...In the context of the overall economy the effects on the total unemployment figures are simply too small to be seen. But the effects on the specific individuals, those who have their hours cut, lose their jobs, are of course substantial.

Chris over at Stumbling and Mumbling, who posted More evidence on minimum wage effects just over a week ago, has also taken on Polly. He lists no less than eight reasons to be against the minimum wage, including this one:

5. Even if all the impact of the minimum wage is upon jobs rather than hours, the jobs lost are just too few to show up in macroeconomic data. Put it this way. New Labour has promised to raise the minimum wage by 30p - 5.9% - in October. This implies a rise in the aggregate wage bill of barely 0.1%. Assuming a price-elasticity of demand for labour of 0.7, this implies that just 17,500 jobs will be destroyed; there are just under 25 million employees.

This is half a week's inflow into unemployment. It's undetectable in aggregate figures. To find the impact of the minimum wage, we need detailed microeconomic studies. Like this one (pdf). It found "some evidence of employment and hours reductions" - just what theory predicts.

Unlike Tim and Chris, I support the current minimum wage system in Britain. While I agree it is not a particularly effective means of reducing poverty (tax credits are much better targeted), it does at least help to prevent exploitation of vulnerable workers.

If there have been disemployment effects, then so far they have been - as Chris argues - too small to detect. But Polly's "suck it and see" approach to future increases is not just dumb, it's dangerous. At a time when we are seeing signs of a marked weakening in the UK job market, the last thing you should be doing is ratcheting up the minimum wage as fast as you can.

A more cautious, iterative approach is surely warranted, otherwise there is a clear risk of pricing not just 17,500 people out of work but many more. I very much doubt that Paul Myners would want to leave a legacy of mass disemployment amongst the low paid as his lasting legacy as LPC chair.

Comments

[Jonn]

The minimum wage debate - like that about the minimum level of unemployment the economy can sustain before inflation starts rocketing - always strikes me as vaguely unsavoury. When did you last see someone who wasn't a banker, economist or columnist - someone who was actually in serious danger of working for under £5 an hour - arguing that a minimum wage was a bad thing?

I know the economic logic behind it, and know there are good arguments against it being set too high. But it's one of those debates where you have to be careful not to sound, in every sense of the term, mean.

(Excellent blog though.)