Thursday, 22 May 2014

Boosting the National Minimum Wage

It’s hardly surprising that the UK National Minimum Wage (NMW) has become a hot political topic again given the historically unprecedented fall in real wages which followed the 2008/09 recession; a decline that is still ongoing for many if not most workers.

Indeed, as concern grows over falling wage shares and rising inequality, minimum wages are the subject of lively debate in countries across the globe: Germany is on the cusp of introducing a minimum wage, Swiss voters have just rejected a relatively high minimum wage and some fascinating developments are taking place at state and metropolitan level across the US.

The degree of political support now associated with the UK NMW is quite remarkable; not only are the Labour Party and SNP bringing forward proposals to boost the value of the NMW, even George Osborne is talking up significant real terms increases. In such circumstances it’s easy to forget the ferocity of the opposition to its introduction back in 1999.

But what exactly do our political parties propose to do about the minimum wage? Earlier this week the Labour Party published “Low Pay: the Nation’s Challenge”, a report prepared by ex-KPMG honcho Alan Buckle. The report - the recommendations of which are strikingly similar to those in a recent Resolution Foundation report - proposes a number of measures to boost the minimum wage relative to median earnings: 
  • Introducing a five-year target to increase the minimum wage to a more stretching (unspecified) proportion of median earnings. A degree of flexibility is retained in the framework: if due to changing economic circumstances the Low Pay Commission (LPC) believes the target cannot be met, they must write to the Secretary of State setting out their reasons. The burden of proof will fall on the LPC whereas in the current system it lies with the Secretary of State if he/she chooses to contest the LPC’s recommendation;
  • Empowering the LPC to establish taskforces of key stakeholders in low pay sectors that are identified as having the potential to pay higher wages with the potential of setting a higher recommended or statutory rate for the sector;
  • Changing the remit of the LPC to give it a stronger role with a longer-term focus – implicit in the above recommendations;
  • Improving enforcement;
  • Introducing a number of measures to ‘encourage’ employers to pay a Living Wage: procurement, tax incentives etc. 
 As for the SNP, the White Paper gives:

 “…a firm commitment that if we are the government in an independent Scotland, the minimum wage will in future rise at least in line with inflation.

“This Scottish Government's Fair Work Commission [which will replace the LPC in an independent Scotland], with members drawn from business, trade unions and wider society, will advise the government on the minimum wage. The Commission will also provide advice on other factors relating to individual and collective rights which contribute to fairness at work and business competitiveness, recognising that both are integral elements of sustainable economic growth in Scotland. The Commission will work with the larger Convention on Employment and Labour Relations. Together they will help the Scottish Government foster a constructive and collaborative approach to industrial relations policy and formalise the relationship between government, employers, trade unions and employee associations”.

It’s reasonable to expect the relative merits of these proposals to come under some scrutiny in the run up to the referendum. Is the best approach to index the NMW to inflation or median wage?

Maybe neither for since its introduction in 1999 the NMW has comfortably outstripped both wages (average and median) and inflation:

But the real value of the NMW has fallen since the recession (although it has maintained its strength relative to the median gross hourly wage - 54.6% in 2013 - because of the historic decline in median earnings) and it's important that politicians urgently consider ways in which it might be restored. For me it is the Resolution Foundation's approach which is most persuasive; a broader approach to the issue of low pay is essential and overdue.The Government should make an explicit long-term commitment to reducing the incidence of low pay and it should resource the LPC appropriately.

The Buckle Report recognises that the LPC is effective and credible as the Scottish Government tacitly acknowledges in proposing a Scottish version – the Fair Work Commission. Yet the proposals of both would constrain its flexibility.

This is particularly interesting in the case of the Scottish Government since the whole approach to industrial relations and labour market policy set out in the White Paper is based around the concept of social partnership. The LPC is one of the UK’s very few social partnership institutions. If the Scottish Government is genuinely committed to the concept then why not let the social partners get on and do their job?

Of course regulatory responses to a NMW declining in real terms and a falling wage share in general have their limits. Sweden, Denmark, Norway and Finland don’t have a national minimum wage. But they all have very high rates of trade union density: 

...and collective bargaining coverage (2007):

...and higher wages and total labour costs:

(Source: Eurostat, hourly labour costs (wages and salaries and non-wage costs such as employers’ social contributions) in EU 28, March 2014)

...and lower incidence of low wage work:

It’s no accident that the UK national minimum wage (NMW) was introduced in 1999 following a steep and sustained decline in union membership:

Replicating Nordic rates of TU density and collective bargaining coverage is a long-term and difficult project under any constitutional scenario. Nevertheless, it would be nice if politicians concerned about low pay could strongly and explicitly acknowledge that ‘collective bargaining is a more efficient way of protecting workers than the law’. A genuine commitment to boosting wages at the bottom end of the income distribution needs to be accompanied by a willingness to confront the asymmetries of economic power which run through Scotland's economy. Examining the role Government might reasonably play in boosting union membership and collective bargaining coverage looks like a good place to start.

Stephen Boyd - STUC  

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