The British case for a minimum wage hike.
People have been writing a lot about the need to raise the minimum wage in the States. This is logical since the US has close to the lowest minimum wage as a percentage of median earnings among comparably rich OECD countries and there's very little evidence, anecdotal or otherwise, that reasonable minimum wage increases have a signficant effect on adult employment rates.
Since I'm here in the UK and too injured to much else, I'll throw another anecdote on the pile: the recent British experience of minimum wage hiking. New Labour has been raising the adult minimum wage in England since 1999, and the series of hikes is due to conclude in October of this year at an adult mimimum wage of £5.35. That's a 49% nominal increase since 1999, about 2/3 of which survives inflation over the period. That's slightly higher than the recent proposed US minimum wage hike, which the Republican Congressional leadership predictably killed. In the U.K., since 2002, the increase in the minimum wage has been ten percentage points higher than the comparable increase in average hourly earnings.
The British Low Pay Commission discussed recent minimum wage and macro experience in England in their 2006 report. In a nutshell -- as can be seen in the snazzy graph on page 17 -- the gross employment rate has risen from 71% to 75% of the British population since 1992 and hasn't changed since 1999. Over the same period, the official adult unemployment rate has fallen from 10% to 5%, the last 1% of the fall coming during the period of minimum wage hikes. (It has risen a little bit recently, but still stands below its 1999 level.) Neither is there any evidence that employment in low-paying service sectors has fallen in response to the higher minimum wages -- every sector has seen an increase in the number of jobs available. The low-wage employment drop-offs that have occurred, in agriculture and textile factory work, are part of long-run trends we all know by heart. In cleaning jobs, the number of jobs had been falling in the late 90s but has actually started climbing again with the minimum wage since 2003. There's no measurable change in retail inflation either since the hikes began.
On the plus side, the snazzy graph on page 30 gives some idea how the poorest workers continue to see their wages rise relative to the median British wage. The Commissioners estimate that 3.6% of all UK jobs saw their wages rise as a result of the last minimum wage hike and 5.2% will be affected by the final rate hike in October. That's a lot of welfare improvement for (so far) basically no discernable macroeconomic cost.
It's also worth noting that the one argument against minimum wage increases that does seem to stick a bit when confronted with data is that high minimum wages discourage employers from hiring youth. That's also true from the recent UK experience profiled in the Low Pay Commission's 2006 report. To remedy this, the Brits, since 2004, now have three levels of minimum wage: for those under aged 16-17, for those age 18-21 and for adults. The new 16-17 rate is set low enough to encourage teenagers to stay in school but to keep them from being completely exploited if they leave. I can imagine problems with such an age-tiered system, but it seems a far more reasonable policy option than letting teenage employment dictate a national minimum wage.
Since I'm here in the UK and too injured to much else, I'll throw another anecdote on the pile: the recent British experience of minimum wage hiking. New Labour has been raising the adult minimum wage in England since 1999, and the series of hikes is due to conclude in October of this year at an adult mimimum wage of £5.35. That's a 49% nominal increase since 1999, about 2/3 of which survives inflation over the period. That's slightly higher than the recent proposed US minimum wage hike, which the Republican Congressional leadership predictably killed. In the U.K., since 2002, the increase in the minimum wage has been ten percentage points higher than the comparable increase in average hourly earnings.
The British Low Pay Commission discussed recent minimum wage and macro experience in England in their 2006 report. In a nutshell -- as can be seen in the snazzy graph on page 17 -- the gross employment rate has risen from 71% to 75% of the British population since 1992 and hasn't changed since 1999. Over the same period, the official adult unemployment rate has fallen from 10% to 5%, the last 1% of the fall coming during the period of minimum wage hikes. (It has risen a little bit recently, but still stands below its 1999 level.) Neither is there any evidence that employment in low-paying service sectors has fallen in response to the higher minimum wages -- every sector has seen an increase in the number of jobs available. The low-wage employment drop-offs that have occurred, in agriculture and textile factory work, are part of long-run trends we all know by heart. In cleaning jobs, the number of jobs had been falling in the late 90s but has actually started climbing again with the minimum wage since 2003. There's no measurable change in retail inflation either since the hikes began.
On the plus side, the snazzy graph on page 30 gives some idea how the poorest workers continue to see their wages rise relative to the median British wage. The Commissioners estimate that 3.6% of all UK jobs saw their wages rise as a result of the last minimum wage hike and 5.2% will be affected by the final rate hike in October. That's a lot of welfare improvement for (so far) basically no discernable macroeconomic cost.
It's also worth noting that the one argument against minimum wage increases that does seem to stick a bit when confronted with data is that high minimum wages discourage employers from hiring youth. That's also true from the recent UK experience profiled in the Low Pay Commission's 2006 report. To remedy this, the Brits, since 2004, now have three levels of minimum wage: for those under aged 16-17, for those age 18-21 and for adults. The new 16-17 rate is set low enough to encourage teenagers to stay in school but to keep them from being completely exploited if they leave. I can imagine problems with such an age-tiered system, but it seems a far more reasonable policy option than letting teenage employment dictate a national minimum wage.
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