Minimum wages cost jobs

The leader of the UK's opposition Labour Party, Ed Miliband, outlines plans today to tackle low pay with a five-year plan to set a new, higher, minimum wage, linked to average earnings. This, it is said, firmly puts tackling inequality at the heart of the party's 2015 general election campaign.

The motive may be noble, but the policy itself is mistaken. A minimum wage helps only those who are already in work. It makes life more difficult for the very poorest, namely those who are out of work.

A minimum wage raises the cost of employing people. That is its whole purpose. But higher wage costs mean that employers – already under financial pressure from domestic and foreign competition, from everyday business costs, and from the costs of government regulation and taxation – have only two options. They can either hire fewer people, or toughen working conditions – cutting holidays, providing fewer breaks, spending less on the work environment.

Professors Richard Vedder and Lowell Gallaway from the United States – which has a much longer history of minimum wage legislation than the UK – explained all this as long ago as 1995, in their Adam Smith Institute report Minimum Wage Costs Jobs.

And the evidence is clear. When minimum wages were introduced in the UK in 1999, they did not seem to add to unemployment. But the starting rate was set very low initially; and the UK was then already on the cusp of one of the biggest (and as we now know, disastrous) credit-fuelled booms in history. With business and employment racing ahead, the job-killing effect of a low minimum wage was hard to see.

It became much easier to see after the 2008 financial crash, though. The first people that hard-pressed employers dispense with, and the last they choose to hire, are people like unskilled workers, young people who need to be trained up, women who want flexible hours, minority groups, and people on benefits who may have to learn or re-learn the habits of work.

These are the very groups that the policy is intended to help. But the post-crash unemployment statistics, with close to a million young people out of work, show that it does exactly the opposite. Starter jobs (remember all those cinema ushers, petrol-pump attendants, and bag-packers in grocery shops?) dry up. Young people or those on benefits cannot even get on the first step of the jobs ladder.

As well as harming those it wants to help, the minimum wage helps those who are already better off, or soon will be. They include students doing low-paid jobs that they regard as purely temporary, a means of getting skills and references for a better job. And second or third earners in a household, working to bring in a little extra cash for luxuries. But these are not the people that the minimum-wage policy is designed to help.

The minimum wage is well-meaning policy – but sadly, a wholly counterproductive one. If you really want to help the poorest, you should help them by improving their access to paid work, by cutting workplace regulation and taxes.