The Economist

The minimum wage

Economics focus: The pathology of French unemployment

IN HIS clear-out of the Labour Party’s attic, Tony Blair spared little: into the skip went Clause Four, and with it any thought of renationalising privatised companies; discarded also were higher income-tax rates, even for the rich. A national minimum wage, however, was too cherished to be thrown away. That sentiment has caused a problem: how to honour the promise to introduce a minimum wage, yet limit the job losses that the policy will cause?

This conundrum has been passed to the Low Pay Commission, a nine-strong panel of academics, trade unionists and business people, now wading through written evidence from unions and employers. On October 14th it is due to hear oral submissions from the Trades Union Congress and the Confederation of British Industry. It has to make its recommendation on the minimum wage to the government by next May.

Nobody seriously expects that the commission will suggest anything like the £4.42 an hour—half the rate received by a male worker halfway up the earnings ladder—that some unions have asked for. That would approach French levels (see chart) and would surely wreck jobs (see article). Less than £4 looks more likely. But last month the president of the Board of Trade, Margaret Beckett, gave the commission an extra degree of freedom. It ought, she said, to consider lower rates or exemptions for workers aged between 16 and 25.

The idea is anathema to trade unions. It might be fair enough, says the Transport and General Workers’ Union, to pay less to those on a training programme, but a general youth exemption is “not intellectually or morally sustainable”. Unison, the main public-sector union, says there would be “serious labour-market distortions”, meaning that employers would dump older workers and hire cheap youngsters. On the other side, in a recent survey of members of the British Chambers of Commerce, 78% of respondents favoured an age threshold: 51% of those said that 18 years of age was an appropriate cut-off.

The reason for varying the wage by age is that under a uniform wage younger workers are more at risk of unemployment: they tend to be low-paid, so a uniform minimum wage would raise the cost of employing them by more than it would increase the cost of older workers. In April 1996, the latest date for which official figures are available, 6% of all male workers and 13% of females were paid less than £4 an hour. For those aged 21 to 24, however, the proportions rise to 14% for men and 19% for women. And about 80% of under-18s in work, of both sexes, got less than £4.

Several countries with minimum wages have lower rates for younger workers. In the Netherlands, 16-year-olds get about one-third of the standard minimum, 17-year-olds about two-fifths, and so on until the top rate is reached at the age of 23. Belgium also has a similar series of annual steps, from 16 years up to 21 (or 22, depending on time in the job). The French, Spanish and Portuguese all have lower minimum wages for under-18s. And when it increased its federal minimum wage last year America introduced a lower rate for under-20s, but only for their first 90 days at work.

There are other complications. The French have special rates for trainees. In Canada, the hourly minimum varies between provinces, from C$5 (£3.20) to C$7. In America, the federal minimum is $5.15 an hour. But five states, plus the District of Columbia, set higher rates. There are also state minimum wages, some lower than $5.15, for industries not covered by the federal law. Some American states also have compulsory overtime pay rates, which sometimes vary by occupation. And on top of all this there is the “tip credit”. Workers who are expected to make a large slice of their pay from tips, such as waiters, need be paid only $2.13 an hour in wages, as long as tips take their total earnings above $5.15.

The government’s aim seems to be to keep the British system as simple as possible. Apart from the possibility of a young workers’ rate, the Low Pay Commission has been asked to pay special attention to the competitiveness of small firms; but that is the only other hint of complication. Regional variations have been ruled out, although only 3.3% of full-time workers in London get less than £4 an hour, compared with 11.3% in Wales. The trouble is, though, that one distortion in a market, such as a minimum wage, can call forth others, such as youth rates and regional variations, to mitigate its worst effects. How complex will Britain’s minimum wage become?

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