Following George Osborne's letter to the Low Pay Commission recommending an increase in the national minimum wage (NMW) of almost 11 percent, we are deeply concerned that the move is one only motivated by political considerations in the run up to 2015, at the expense of nurturing a fragile economic recovery.
Bow Group Research Secretary Luke Springthorpe, said: "The government should learn the lessons of Greece, Spain and Ireland where wages were inflated ahead of productivity growth. With the recovery still fragile, robbing Peter to pay Paul is no solution to improving the UK's competitive position in the world, and the Chancellor would do well to remember his words in his Autumn Statement when he asserted that we cannot "pretend we can make this nation better off by writing cheques to ourselves, and must instead make the hard choices." With youth unemployment still above 20 percent, productivity growth lagging and exports in need of further support, now is not the time to be endorsing arbitrary double digit wage hikes.”
Bow Group Chairman Ben Harris-Quinney said: "The proposed above inflation hike of the National Minimum Wage is the final piece of proof that affirms what Bow Group members have long asserted: George Osborne and the government are artificially manipulating the economy for political gains in the run up to 2015, to the detriment of its medium to long-term development. The government should be looking to Germany and Austria, where the absence of a minimum wage has contributed to the Eurozone's lowest rates of youth unemployment at 7.9 percent and 8.7 percent respectively. We should not be further hamstringing the prospects of our youth or small businesses, but should instead focus on improving the provision of vocational education in the UK and improving the UK's competitiveness internationally. This is the only way to secure a long term recovery and rebalance the economy, and this goal should be above political manipulation"
The Bow Group's response to the Chancellor's announcement (here) identifies the following difficulties that may arise if the increase goes ahead as planned:
1) Damaging the balance of payments position: Given that the UK continues to have a large balance of payments deficit, there is a risk of inflicting damage to the revival of exports. A threat already exists owing to the UK’s strengthening exchange rate, and this should be factored in when determining domestic wages in Sterling terms.
2) A risk to job security for the unskilled: The end result of the imposition of a high minimum wage could well be a reduction in the headcount of labour performing such jobs. Major retailers are among the largest employers of low cost labour, yet the likes of Tesco & J Sainsbury operate on a profit margin of approximately 3% (before tax). If the cost of labour starts to encroach on their wafer thin margins, it is likely that we would see even more self-service checkouts taking the place of till staff, together with moves to reduce headcounts and employ staff on contracts with less clearly defined hours.
3) Exacerbating youth unemployment: The result of the minimum wage on unemployment of 15-24 year olds is laid bare in Eurozone statistics. Those countries in the highest bracket (highlighted in Group 3 of Figure 2 of the briefing), including the UK, most fail their youth miserably with regards to ensuring their employability, with over 18.5 percent of them sitting
idle in many instances.
4) Inflationary risk: There is also potential for inflationary risk to manifest itself. The minimum wage in itself is unlikely trickle through tosubstantial inflationary pressure from wages, but the 10.9 percent figure may well set a benchmark for pay demands elsewhere. Given that productivity growth in the UK remains static, this could lead to inflationary pressure if the ensuing increase in demand is not being met with an increase in supply resulting from the output of the labour force.
Instead, we recommend that the government follows the lead of practices in countries such as Germany and Austria. Here, there is no minimum wage set by the government. The benefit of allowing businesses to determine the appropriate rate of remuneration for their employees sees these countries with the lowest rate of youth unemployment in the Eurozone.
