Commentary on Political Economy

Monday, 18 January 2021


The minimum wage alone can’t save the US working class

A man protests for a higher minimum wage in Chicago. Governments should also curb practices that drive down labour costs by increasing worker insecurity
A man protests for a higher minimum wage in Chicago. Governments should also curb practices that drive down labour costs by increasing worker insecurity © Scott Olson/Getty

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In 1909, UK politicians debated an idea they called “an experiment and a revolution”: the introduction of a minimum wage in certain sectors of the economy where poverty pay was rife.

Winston Churchill said it was a “national evil” that any Briton “should receive less than a living wage in return for their utmost exertions”. Another proponent noted these workers often relied on charity or government support to top up their incomes. “A trade which cannot exist without such assistance must be a thoroughly rotten one and a trade of which we should be well rid.”

Sceptics warned a wage floor could make low-productivity workers unemployable: “It would be a cruel kindness if . . . we were to add to the sufferings of these poor workers one further crushing disaster — namely, to take away from them the only work they have.”

More than a century later, a remarkably similar debate is taking place in the US, where president-elect Joe Biden wants Congress to increase the federal minimum wage from $7.25 to $15 an hour. Mr Biden echoed Churchill last week, saying “no one working 40 hours a week should still be below the poverty line”. Critics claimed the move would kill jobs.

There is no need to rehash theoretical arguments from a century ago. Unlike the Edwardian Brits, who really were embarking on an experiment, Americans have access to a wealth of empirical evidence from around the world about the effects of minimum wage rises.

The first lesson is reassuring. Minimum wages set at up to 60 per cent of median pay don’t seem to affect employment levels very much. The UK government’s comprehensive round-up in 2019 found no evidence of significant job losses as a result of minimum wage increases in the UK, Germany, Hungary, and several US states.

US critics are particularly worried that a “one-size-fits-all” rate is inappropriate for an unequal economy with poor areas and rich ones. Germany had a similar issue when it introduced a minimum wage of €8.50 per hour in 2015: 15 per cent of workers nationwide got a pay rise as a result of the policy, but the figure was one in three in the poorest areas. Nonetheless, there has been no significant impact on employment or unemployment, though it did drive some workers from smaller employers to bigger ones.

The second lesson from the international evidence is more cautionary. Some benefits of a higher minimum wage can leech away in an under-regulated labour market.

In the UK, the Conservative government has pushed up the minimum wage for over-25s (branded the National Living Wage) aggressively since 2016. But enforcement is underfunded and the penalties are low. As a result an estimated 26 per cent of workers aged over 25 were paid less than the minimum in 2019, up from 20 per cent in 2016.

Some employers have flaunted the law in plain sight, for example in the city of Leicester, where the “going rate” for sewing machinists in parts of the industry is roughly £4 an hour. Germany, too, has allowed some corners of its economy to operate unchecked, as the scandal over working conditions in meatpacking revealed.

There is also evidence that some UK employers, faced with higher hourly wage costs, stripped out other labour costs. Overtime payments and weekend premiums have been cut. Research suggests the rising minimum wage has contributed to an increase in the use of zero-hours contracts, where hours can be shifted up and down quickly so that employers do not pay for idle time.

It has been good news for temp agencies such as Staffline, which provide “contingent” hourly workers to factories and warehouses. The rising minimum wage “increases the overall cost base for a factory”, Staffline’s chief executive explained to investors on a call in 2018. “And one of the ways of offsetting that and dealing with it is to increase the proportion of your workforce that is temporary, because you can deploy our workers by the hour rather than having permanent workers.” Yet these temporary jobs are hard to build a stable life on.

This is not an argument against raising the minimum wage. But on its own, $15 an hour won’t fix what is broken for America’s working class.

Mr Biden should push for a floor on conditions as well as hourly wages, curbing those practices that drive down labour costs by increasing worker insecurity. Enforcement (which has been undermined by President Donald Trump) will be key too. Without that, as Churchill put it in 1909, “the good employer is undercut by the bad, and the bad employer is undercut by the worst”.

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