Commenting on the rise to the National Minimum Wage, Research Director of the Adam Smith Institute, Sam Bowman, said:
Many will welcome the first real terms cash rise to the National Minimum Wage level since 2008, but there is cause for concern – and there are better ways to help the working poor. Most high-quality academic surveys of the minimum wage find that increases lead to more unemployment, and there is some evidence to suggest that the minimum wage slows the creation of new jobs too.
Wages are typically set according to worker productivity – if for whatever reason a worker cannot produce more than the new NMW rate of £6.50/hour in value, she will simply not be able to find a job. That risks depriving her of the on-the-job skills that would boost her future productivity, and indeed there is good evidence to suggest that minimum wage laws lead to decreased lifelong earnings among the most economically vulnerable groups in society.
There are better ways of improving the welfare of the working poor that would create jobs, not threaten them. Minimum wage workers still face a high tax bill, mostly thanks to National Insurance, which personal allowance threshold rises do not affect. Indeed the government could give all full time minimum wage workers a ‘living wage’ by taking them out of tax and National Insurance, without risking jobs as the NMW does.
Supply-side liberalizations like planning reform would reduce the cost of living. And direct income transfers, either through a reformed Working Tax Credit system or, better, a fully overhauled welfare system that topped up low-paid workers’ wages automatically, would be an economically sensible way of boosting the incomes of the low paid.
We welcome the fact that the Low Pay Commission has resisted calls by politicians for massive increases in the NMW, which could be truly disastrous. Nevertheless, the NMW is a bad way of improving the welfare of the poor because of the unemployment it creates – there are better, if more politically challenging, ways to fight poverty that do not destroy jobs.
Notes to editors:
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The Adam Smith Institute is an independent libertarian think tank based in London. It advocates classically liberal public policies to create a richer, freer world.