£10 minimum wage would result in the wages of more than a quarter of private sector employees being set directly by Whitehall
Between 1999 and 2015, the minimum wage met its objective of increasing the pay of the lowest paid employees, without any evidence of significant reductions in employment. That success was built on it being set, and gradually increased, by an independent expert body carefully assessing its impact at each stage.
The Conservative and Labour parties are now both departing from this model, proposing dramatic increases in its level. The proportion of employees aged 25 and over paid the National Minimum Wage has already doubled from 4% to 8% and will rise to 12% under Conservative plans (see Figure below). Under Labour party plans (to raise the minimum to £10 an hour by 2020) 22% of employees aged 25+ and more than a quarter of private sector employees aged 25+ would be paid at the minimum.
The fact that there is no evidence of a negative impact of the minimum wage on employment up until 2015 tells us nothing about the likely impacts of such big expansions of the minimum wage. Beyond some level higher minimum wages will reduce hours and employment, penalising precisely the groups they are supposed to help. There may well be a case for further gradual increases in the minimum wage but increases on the scale and at the speed being proposed create big risks.
The risks are all the greater when, as the Labour party is proposing, the new £10 minimum is intended to benefit those aged 18 to 24 as well as older workers. 60% of these young workers would be on a £10 minimum wage. The long term costs to them if that results in lower employment would be very substantial indeed.
These are among the findings of a new report, funded by the Nuffield Foundation, in which IFS researchers have analysed the Conservative and Labour party plans for minimum wages and examined which groups of employees will be particularly affected by the proposed policies.
Other key findings include:
- The minimum wages proposed by both parties are high relative to other comparable countries. Labour’s plans would result in a minimum wage level (relative to average earnings) similar to that in France, where the minimum wage is the highest among all comparable countries.
- Part time, female and private sector employees and those in the North of England, the Midlands and Wales are most likely to be affected by the proposed increases. For those aged 25+, under Labour’s plans Whitehall would effectively be setting the wages of:
- around one quarter of female employees;
- one quarter of private sector employees;
- one quarter of employees in the Midlands, North of England and Wales; and
- almost half of part-time employees
- The benefit from minimum wage increases is concentrated among middle-income households, not the lowest-income households because:
- many low earners live in households where someone else is working;
- many of the lowest-income households have no-one in work at all; and
- low-income households that do gain are likely to see significant reductions in means-tested benefits as a result of higher earnings.
- Labour’s plan to extend the £10 minimum wage to all employees aged 18 and over (excluding those eligible for the apprentice minimum wage) amounts to a 62% increase in the minimum wage for 18-20 year olds and a 29% increase for 21-24 year olds. This would mean that 60% of 18-24 year old employees would be paid the minimum, including 77% of 18-20 year olds.
- Both parties’ plans imply big increases in the costs of employing workers. Looking at wages and employers’ National Insurance, the Conservative plan raises the cost of employing at least 2.8 million workers by 4% on average, and the Labour plan raises the cost of employing 7.1 million workers by almost 15% on average. Labour has suggested that they would compensate some employers for these additional costs but well targeted and effective compensation would be hard to achieve.
Jonathan Cribb, a Senior Research Economist at IFS, and an author of the report, said,
“Carefully set minimum wages can be a useful policy tool for governments seeking to help those on low wages. But at some point, higher minimum wages will reduce the employment of lower skilled workers. Since we do not know where that point is, sudden large increases are risky. They endanger the jobs of those they seek to help. Labour's proposal to rapidly extend a £10 per hour minimum wage to 18-24 year olds, regardless of the state of the economy in 2020, is a particular gamble. Given how harmful periods of unemployment can be for young people, the long term costs could be considerable.”
Figure: Proportion of employees aged 25+ paid the minimum wage, 1999–2017 and under Conservative and Labour plans for 2020
Source: Figure 5 of “Minimum wages in the next parliament”.
Notes to editors
- ‘Minimum wages in the next parliament’ by Jonathan Cribb, Robert Joyce and Agnes Norris Keiller is one of a series of IFS briefing notes we will be producing ahead of the June 2017 election and will be published on a dedicated election micro site at 00.01 on Thursday 11 May 2017: https://election2017.ifs.org.uk/.
- IFS Election 2017 analysis is being produced with funding from the Nuffield Foundation as part of its work to ensure public debate in the run-up to the general election is informed by independent and rigorous evidence. For more information, go to http://www.nuffieldfoundation.org.