Minimum wage rises do not seem to boost UK productivity

Good morning. Below are some thoughts on a bold economic experiment George Osborne embarked on that Labour has continued. No, it’s not austerity, but the big increases in the statutory wage floor.

The cost of ‘making work pay’

In 2015, Osborne did two things: he drastically cut back in-work benefits and significantly increased the minimum wage, setting the target that it would reach 60 per cent of median earnings by 2020. Since returning to office, Labour has continued that approach, with another chunky increase having come into force yesterday. This has drastically reduced low pay in the UK. Here’s the key chart from the Resolution Foundation:

When Osborne changed how the minimum wage worked, one worker in 10 had an hourly rate less than two-thirds of the median. Now just one in 29 do.

I have to hold my hands up here. I did not think this was a good idea. I thought it was a good policy proposal that would exert too high a price. I thought shifting the balance of responsibility for supporting the incomes of working-age people between employers and the state would be bad for the economy, hurting smaller businesses and people at the bottom of the income distribution. I thought it would lead to more automation and therefore more unemployment, but that productivity would increase.

That didn’t happen. But it’s worth stopping and thinking about Keith Fray’s terrific chart — the most important chart, I think, in British politics.

Obviously I’m not saying that a change Osborne made to how the UK sets its minimum wage in 2015 is why the UK has had such bad GDP and productivity growth since the financial crisis. What I am saying is this: it is striking that it doesn’t appear to have done anything at all for UK productivity.

We simply don’t know enough about why the UK has a higher number of people on sickness benefits than peer countries. But I continue to suspect one reason is that a consequence of the higher minimum wage is that work even at the mezzanine level of the economy has become much more intense. (We will get a big, useful bit of empirical research on this at the end of the year, though the Resolution Foundation’s analysis also suggests this.)

Labour is doubling down on Osborne’s shift in responsibility, with not only an increase in the minimum wage but a rise in employers’ national insurance contributions.

Increasing the minimum wage is a great lever to improve earnings at the bottom of the income distribution. But, like all policies, it has costs as well as benefits.

I continue to think part of why we have more young people not in employment, education or training (Neet) and why work has become more intense is that employers have responded to these increased costs by asking for more in return. That may be a price worth paying for a lower in-work benefits bill for the state. But it also has implications for working conditions and welfare expenditure.

What drives the UK’s higher rates of sickness and inactivity among the working age population? Broadly speaking, among the young it is increased anxiety — which makes them a poor fit for a workplace that is becoming more intense. Among older workers it is physical ailments, which are causing people to drop out of the labour market a little earlier than their age of eligibility for the state pension. Increased workplace intensity has implications for these workers too, because it creates a colder world for people who are beginning to slow down.

As I say, this is a good policy idea. But it comes with a price tag. Just as taxing everyone to increase tax credits is a good policy that comes with a price tag. And the costs of the new approach to “make work pay” may well pull against everything else Labour is trying to do.

Now try this

A nice thing about moving to a bigger flat is rediscovering books you had on your shelves that are now ready to be re-read. A case in point is Ned Beauman’s marvellous Madness Is Better Than Defeat, the story of two rival expeditions to a mysterious temple. It’s an engagingly mad yarn.

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