Minimum Wage Campaign

Why £3.60? The Case for a Higher Minimum Wage

The Low Pay Unit and most trade unions have called for a minimum wage set at half male median earnings. In 1999 this was £4.94 an hour, rather more than the £3.60 at which it was introduced in April.

The Low Pay Unit is still campaigning for a higher rate, and a link to earnings. Why?

The case for a national minimum wage

First, we should look again at the arguments for introducing a national minimum wage. Governments introduce minimum wages for two reasons. The first is to eradicate extreme cases of exploitation. The second is to tackle inequality, allowing the lowest paid to move closer to the average. The first reason might produce a lower rate than the second.

Britain has both exploitation and inequality. Over 3 million households live in poverty, despite having at least one member in paid work. Alongside this, there is growing polarisation in incomes and the rewards from employment.

Britain experienced the fastest growth in income inequality of any advanced country except New Zealand in the 1980s and early 1990s. The earnings of some low paid workers, such as checkout operators and bar staff, have even fallen in real terms over recent years, despite falling unemployment. Last year, the United Nations ranked the UK 15th out of 17 industrialised countries on its deprivation index. This year, UNICEF ranked the UK in the bottom four of its league table of child poverty in rich nations.

On top of this, there are deep inequalities locked in to the pay structure in the UK labour market. They are not related to differences in skill levels nor to qualifications and are not getting noticeably narrower, despite nearly 30 years of equal pay legislation.

Women's hourly earnings are only 80% of their male colleagues' earnings. This figure is for full-time workers: part-time workers earn even less. Ethnic minority and disabled workers are also paid less, even when they have higher qualifications.

These inequalities must be addressed; they damage the social and economic fabric of the country, and even affect the most basic measures of welfare - illness and mortality. The 1998 Acheson inquiry into health states unequivocally that to tackle this, "further steps should be taken to reduce income inequalities and improve the living standards of poor households".

Creating a formula

Although the advent of the UK's first national minimum wage was a triumph, many were disappointed with the rate set. £3.60 an hour was too low to make a real dent in poverty pay, discrimination and inequality.

A minimum wage related to full-time, male earnings would provide a link between disadvantaged workers and the rest of employees.

It would also mean that people in paid work earned enough to participate in the society around them.

A formula would mean that the minimum rate would not stand still. It would automatically uprate the level in a clear predictable way. A fixed rate immediately begins to lose value compared to the majority of earnings. Even increasing it in line with inflation will mean it falls further behind over time - look what has happened to the old age pension.

To reach the hourly figure, you take:

• median weekly earnings for men working full-time (£374.3 in the 1999 New Earnings Survey);
• divide that figure by average full-time hours, excluding overtime (37.9);
• then halve it. This gives a figure of £4.94.

The formula for setting the national minimum wage rate proposed by the Low Pay Unit is not a campaigning tool, nor a negotiating strategy. It is based on clear principles of equality and fairness, and is designed to exclude existing pay inequalities. After all, this is a measure to tackle inequality.

Is this figure really too high? Is the formula flawed?

It was suggested that an introductory rate of £4.94 would have been irresponsible. The argument goes that it would have cost a lot in terms of job losses and rising inflation, and three times as many employees would have been affected.

But this ignores any positive benefits of a higher rate:

• reduced spending on benefits;
• improved work incentives;
• the encouragement to businesses to invest in training;
• the improvement in productivity brought about by better staff morale and lower turnover;
• the stimulus to local demand for goods and services in depressed regions.

It has also been claimed that a higher figure would have forced many thousands into unemployment. This view has been discredited. It is based on unrealistic assumptions about how labour markets work.

In April, May, June, July and August 1999, unemployment actually fell. Employers were clearly not being discouraged from taking on new staff by the existing minimum wage.

We reject the argument that we should consider the minimum wage level in relation to changes to the tax and benefit system (for example, the working families tax credit). These changes mean the net income of low earners will actually be considerably higher than £3.60.

Apart from the fact that people without children will not gain from the WFTC, these tax credits are intended to complement a minimum wage by keeping households with extra expenses (mainly children) above subsistence level. They are not meant to replace it.

There is a danger that bad employers will pay less than the value of the work done, knowing the state will subsidise the low wages they pay. Talk of "effective hourly wage rates" can encourage this by obscuring the line between earnings and top-ups.

It is also imperative that benefits and wages are treated separately, or what little bargaining power low paid workers do have will be undermined, and the wages of fellow workers not receiving benefits will be dragged down.

The Low Pay Commission collected a great deal of detailed evidence about the state of the low paid labour market and international experience of minimum wages, but it admitted that the choice of rate "would ultimately rely to a large extent on our judgement".

This judgement was based on assumptions about the labour market and restricted by the Commission's remit - it was not asked to recommend an uprating mechanism.

A higher rate of minimum wage related to average earnings has been condemned as taking no account of economic circumstances or the dynamics of the labour market. This, it is said, will not help the low paid.

But a system which takes no account of discrimination and lack of bargaining power will not help the low paid either.

A successful minimum wage must recognise the effects on employment and inflation - but there is nothing magical about £3.60 that will balance conflicting objectives.

Where the line is drawn is inevitably arbitrary, and represents a political choice.

The impact of the national minimum wage

The first New Earnings Survey since the introduction of the minimum wage showed that it has clearly had an effect, and there are fewer people than before on truly derisory wages. In addition, after several years' stagnation, the gap between men and women's pay has shrunk: women make up the majority of the lowest paid workers so even a minimum wage set as low as £3.60 an hour narrows the gender gap.

But whilst it has made a difference to 2 million workers, such gains will not be repeated unless the rate is increased and linked to average male earnings.

Research by the LPU shows that many are being paid exactly the statutory rate and no more, with no plans for rises if the minimum does not change. The true picture emerging is not a lessening of inequality, but a bunching up of low earners around the £3.60 mark.

Workers at this level rarely get system annual rises. Almost all are outside trade union collective agreements, and very few are on incremental pay schemes. Without a link to average earnings, their pay will fall behind and inequality will actually increase.

So while claiming to take into account the dynamic nature of the labour market, our current minimum wage fails to recognise that a fixed rate will suppress wages or act as a brake on increases.

There is a real danger of replacing a culture of low pay with a culture of "minimum wage jobs", where the minimum becomes a going rate rather than a floor beneath the pay ladder.

Conclusion

The introduction of a minimum wage has been a cause for celebration, but setting a low rate that will not tackle structural inequalities and discrimination in the labour market, and which will not keep up with rising living standards, represents a missed opportunity.

The LPC has done an excellent job within its remit, but its conclusions - reached on the basis of judgement - cannot be defended on economic grounds as the ideal solution.

With so many facing huge and unacceptable inequalities, without the bargaining power even to begin to address them, the case for a minimum wage tied to average earnings at a level which can provide a decent living standard remains compelling.

This article appeared in The New Review in 1999.