Peter Burgess: The minimum wage debate

Possibly one of the most controversial matters facing industry, government and workers is the subject of the minimum wage. Before the minimum wage was introduced in the late 90s most employers opposed its introduction, stating that it would destroy jobs. It didn’t.

You can rest assured that employers may well oppose any significant increase now on the same basis, that it would destroy jobs and of course raise costs. However, with cost of living likely to be the predominant issue in the run up to the 2015 General Election the proposal to significantly increase the minimum wage may well find favour in some unexpected places.

Why do employers think it will destroy jobs?

Well it’s quite simple actually. Assume you are the store manager of 'Tesbury’s Supermarket' in Watford. You have a wage budget of £1 million per year. The majority of your shelf-filling staff are on the minimum wage and they make up 50% of your workforce. You will budget for an increase in wage costs to be in line with inflation at 2%.

The Government then introduces a 10% increase in the minimum wage. This will push your wage costs up by £50k. You are not allowed to go over your wage budget. Therefore, the only way to stay in budget is to lose some members of staff.

That is the argument for not increasing the minimum wage; and, of course, we all would accept that having people in lower paid jobs is better than having no jobs for them at all.

However, this isn’t necessarily so. If 'Tesbury' is like any of the major supermarket chains it is already operating at maximum efficiency and has no slack in the workforce.

They cannot reduce the number of staff without hurting sales. So, in fact, they have to increase the budget. This will have to translate through to higher prices, but only slightly. Does this make them less competitive?

No, it does not. Let us assume that their main rival, 'Mosda Supermarket' on the other side of town, will also have to increase the pay of its workforce, and therefore its prices, and the status quo is maintained.

A small price to pay?

It does, however, mean that we have to pay more for our food. The rate of inflation would go up, squeezing living standards — so we are back to square one. Only you’re not actually, because it is not only the people on minimum wage who are paying more for their food. It is all of us. To the majority of us a tiny increase in the price of our food would not cause us too much hardship; whereas, on the other side of the equation, the lowest paid in our society are better off. Morally, this has to be the right thing to do.

There is a much bigger prize that may persuade the Government that this is the right thing to do. Many people on minimum wage are also on benefits. Any increase in the minimum wage would save the Government

significant amounts of benefit payments at a time when the Government is desperate to bring the welfare budget, which eats up about one third of all government spending, down.

Add that to the warm glow it would give the Chancellor in the run up to an election, and I think we can safely assume a significant increase is on the way.

Industry won’t like it and I am sure many businesspeople reading this article will be appalled at the prospect. But this government doesn’t have to worry about them. Almost for sure, all political parties will be arguing for this increase as they compete in the battle for which improves people’s living standards.

And the future?

Of course, what would really boost this whole process would be if the Government returned some of the savings made on benefits to the employers by reducing employers national insurance contributions, otherwise known as the jobs tax. I have argued on these pages before that the lowest paid in our society should not be paying any tax — nor should employers be punished for creating jobs.

Peter Burgess is MD of Retail Human Resources Plc. He holds an MBA from The London Business School and is a Fellow of the CIPD.

Peter Burgess

Monday, 17 February 2014 at 12:13pm

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Comments

Thanks, nice clear explanation for the economically-hard-of-thinking like me.

A bit like taking a few breadcrumbs from everybody in order to give a whole loaf to the really hungry.

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