Commenting on the Low Pay Commission's recommendation that the National Minimum Wage should rise by 3% today, the Adam Smith Institute's Research Director Sam Bowman said:
“The empirical evidence is pretty clear that minimum wage increases lead to more unemployment (http://www.nber.org/papers/w12663), slow growth in the creation of low-skilled jobs (http://www.nber.org/papers/w19262), and lead to long-term reductions in some people’s income by ‘kicking away the ladder’ and delaying their acquisition of workplace skills (http://www.nber.org/papers/w10656). These risks are significant enough that raising the minimum wage should be judged as, at best, a very risky way of helping the poor and runs the risk of harming them instead.
“Instead, there are two things the government should do to help the working poor. It should peg the personal allowance and, crucially, the national insurance threshold to the minimum wage level, so nobody on minimum wage pays any tax on their income. This would give full-time minimum wage workers almost exactly as much income as they would be on a “Living Wage” that was being taxed at current levels. If necessary, the 40p rate threshold should be lowered to offset this for those earners to make sure that this is targeted at low- and middle- income earners only.
“In the medium-term, the government should simplify the tax credits system and overhaul welfare in general along the lines of a ‘Negative Income Tax’, which automatically topped up low-income workers’ wages with a steady taper to avoid disincentivising work. The simpler income redistribution is, the better for low-paid workers.
“A 3% rise in the minimum wage is modest so the negative effects that it has are also likely to be modest. Nevertheless, it is still likely to be harmful on net. Rather than trying to shift costs to businesses, the government should accept that it cannot wave a magic wand to help the poor. Instead it has to accept the existence of trade-offs and find savings elsewhere to pay for much-needed tax cuts for the poor."
For further comment email sam@adamsmith.org.
The Adam Smith Institute is an independent libertarian think tank based in London. It advocates liberal public policies to create a richer, freer world.