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Ian Brinkley
Economic Advisor
Ian Brinkley

Minimum Wages and the Low Pay Commission

Authors: Ian Brinkley

19 May 2014

The Labour party has today published a report by Alan Buckle on the future of the Low Pay Commission, the Living Wage, and the National Minimum Wage. The report is part of the Labour Party’s Policy Review. The broad thrust has been endorsed by Mr Milliband, but it is still a little unclear whether all or some of the recommendations will find their way into Labour’s Election manifesto.

The Low Pay Commission is to be given a wider role to address some of the underlying linkages between low pay and productivity. This is sensible and is close to the conclusion that The Work Foundation came to in 2007 in a report by David Coats. A similar recommendation was also made by the Resolution Foundation earlier this year. However, the Low Pay Commission (LPC) would require a very significant increases in resources to undertake such a remit in addition to the core task of setting the National Minimum Wage (NMW).

The report also says the Government should set a “stretching” target to increase the National Minimum Wage faster than the median. In my view this has little to commend it. It would reduce the discretion of the LPC to set the NMW independently of the government of the day. One implication is that the LPC has been too cautious and that without such guidance it would increase the NMW by less than politicians think is desirable. The target could easily become a stick to beat the Commission and the government every time a settlement fell below the rate required to deliver the target.

The Commission would have to write to the Secretary of State saying why the target could not be met without significant job losses and provide “compelling” evidence to support their position. As the Commission already publishes an exhaustive evidence base to justify the current rate setting it is not clear what the new system adds other than to increase the political pressure on the Commission to settle in line with the Government’s aspirations. The Commission is also required to tell the Secretary of State what to do to get the plan back on track – though many of the factors such as macro-economic policy will be beyond the Commission’s remit and competence.

The argument that it would give more certainty to business is unconvincing. Wage setting is typically carried out on a year to year basis and forecasting what will happen to median earnings subject to high degrees of uncertainty. Previous consultations with business by the LPC did not identify this as a significant concern and there was little support to move away from annual rate setting. The LPC already gives some indication of where the rate is going and in 2014 published more detailed guidance on what factors will be important in setting the rate over the medium term.

The report is mercifully cautious on sector based minimum wages, saying that the LPC could establish taskforces of employers, trade unions, and stakeholders to develop a roadmap to tackle low pay and that the LPC could look at the case for these taskforces to be given power to set higher rates in their sector.

We do not know what sort of target might be set. The LPC might be able to live with a target that implied a slightly faster rate of growth than median earnings, as given generally favourable economic conditions there is a reasonable chance it would be setting the NMW around this level anyway. Setting a more ambitious and stretching target, unless heavily qualified, would be more problematic for the LPC and make it harder to deliver unaminous recommendations to government.

The ability of wage floors alone to reduce the share of low paid jobs in the economy is always going to be limited. Focusing on efforts to improve productivity in low wage sectors and provide people every opportunity to move out of low paid work and employing a much wider range of policy levers – including industrial and housing and planning policies – as part of a low pay strategy are less eye-catching but may prove much more effective in the long term. The report’s ideas for a wider LPC remit and sector based taskforces to address these fundamental issues can both be supported.