Britain's Conservative politicians cheered and pumped their fists on Wednesday when finance minister George Osborne announced a bumper increase in the minimum wage, but the economic gains from the change are likely to be much more muted. The plan to raise the minimum wage by 40 percent by 2020 was the surprise of Osborne's first budget since the Conservative Party won an unexpected outright victory at May's election. By tweaking a policy of the vanquished centre-left Labour Party, Osborne cast it as an end to taxpayer subsidies for low-paying firms as he tried to claim the political centre ground.
But it may keep some people out of work and fail to compensate others for the big cuts in welfare he also announced. Fears of job losses when Britain first introduced a minimum wage in 1999 proved wide of the mark. However the much broader scope of the new minimum wage, which will cover about 10 percent of the workforce, makes some economists nervous.
"The introduction of the 'national living wage' does have the potential to raise the natural unemployment rate and deliver real economic costs," said Philip Rush, chief UK economist at Japanese investment bank Nomura. Businesses which rely heavily on cheap labour, such as supermarkets and pubs, have grumbled, while anti-poverty groups say the rise will not offset benefit cuts.
The current minimum wage for those aged 21 and over is 6.50 pounds ($10) an hour and will rise to 6.70 pounds in October. Osborne said that from April 2016 employers will have to pay a 'national living wage' of at least 7.20 pounds to over-25s. This will rise steadily over the following four years to around 9.35 pounds an hour, 60 percent of the average wage for those aged 25 or over. The current minimum is less than half the average wage, while in the United States it is under 40 percent.
The big increase roughly doubles the number of workers who will come under the scope of the plan and get a pay rise. It may also have knock-on effects for up to a quarter of the workforce, according to figures from the government's budget watchdog. With the Bank of England watching wage growth as it judges when to start to raise interest rates, Nomura's Rush said the new minimum wage could encourage it to act sooner.
The higher minimum wage will also cost jobs, though Osborne said the effect would be small. The Office for Budget Responsibility estimates that the change will push up Britain's long-run unemployment rate by 0.2 percentage points - the equivalent of 60,000 jobs - and that other workers will lose out from employers offering fewer hours.
Economic output by 2020 will be 0.1 percent lower than it otherwise would have been as people work less, the OBR said. Rush fears the effect on jobs and growth could be much bigger, and that it is too optimistic to simply extrapolate from the limited impact of previous rises in the minimum wage. Much depends on whether firms improve a dire recent track record on productivity so that they can afford pricier workers.
A minimum wage nearer the national average also gives businesses less scope to cut pay rather than jobs in an emergency, as they did during the last recession. Supermarket chain Tesco, Britain's biggest private-sector employer, backed the new national living wage on Thursday. But there were hints from employers that other benefits such as paid breaks or pensions could be under threat.
Higher wage bills could lower profits at pub chains such as JD Wetherspoon and Mitchells and Butlers by almost 10 percent, according to an estimate by equity analysts at Irish stockbrokers Goodbody. The low paid will also bear the brunt of 12 billion pounds of government welfare cuts announced on Wednesday. For many families, this will outweigh gains from the higher minimum wage. The Resolution Foundation think tank estimates that a couple on the minimum wage with three children will be 350 pounds a year worse off, even after big pay rises. "It will take many struggling families years before they earn their way back to their current position," the foundation's chief executive, Gavin Kelly, said.
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