Economists confident minimum wage does not cause unemployment, says Low Pay Commission Chair | Video
World Finance interviews David Norgrove, Chair of the Low Pay Commission, on the impact of minimum wage legislation on the UK economy
The UK has had a minimum wage for the last 15 years, but how has it shaped the country, and can it be seen as an example for Germany, who will be implementing it next year? David Norgrove, the Chair of the Low Pay Commission, shares his insights.
World Finance: Well David, since 1999 how would you say minimum wage has shaped Britain?
David Norgrove: Well it certainly helped the low paid. The evidence is clear that the pay of the people at the bottom has risen faster than it would otherwise have done, and faster than average earnings, and faster than prices. So it’s certainly helped the low paid, and all the research that we and others have done has shown that it’s had no effect on employment of low paid people, so it’s done what it was intended to do.
World Finance: Well 15 years on, and even the architect of minimum wage, Sir George Bain, said it isn’t working. Do you think it’s now maybe run its course as an artificial way to bolster an economy?
David Norgrove: He didn’t say it wasn’t working, he said it’s worked extremely well, but he’d like to push it further, and there’s certainly a case for some of the things that he’s mentioned. I actually think that it’s working well, and the risk is that if you overload it with too many things it starts to break down, that’s always a risk with something that’s successful.
World Finance: Well you did say that minimum wage doesn’t affect unemployment, but this does contradict a lot of economists…
We’ve had over a hundred research studies done by academic economists from around the country over the last 15 years, and none of them has found any significant effect
David Norgrove: I shared that view right back at the beginning, that the risk with any kind of minimum wage is that it causes unemployment. But I think most economists have now come round to the view that it doesn’t, provided it’s set at a sensible level. We’ve had over a hundred research studies done by academic economists from around the country over the last 15 years, and none of them has found any significant effect. Occasionally you get one that happens to show one effect, but it’s not replicated elsewhere, so I think we’re pretty confident that it hasn’t affected employment.
World Finance: Minimum wage does fall quite short of the living wage, so in that context, is there really any point in it?
David Norgrove: It’s not the same as a living wage, it’s not designed for people to live on, it’s designed as a floor, and actually even the living wage isn’t really enough for people to live on because it doesn’t take account of how many hours people work or what their family circumstances are, just as the minimum wage doesn’t. Really you need to look to the tax and social security systems to reflect what people need to live on.
World Finance: Well it has been suggested that minimum wage increases have been too low, which has had a direct impact on consumer demand, weakening it substantially. Do you think this is the case?
David Norgrove: It’s really hard to say what would have happened otherwise. What you can say is that, during this downturn, the minimum wage has fallen less in real terms than other earnings. The pay of the people at the bottom has behaved quite differently from previous recessions, where they tended to do less well than others. Should it be used as an instrument to raise consumer demand? I don’t think so.
World Finance: During the global recession, do you think minimum wage was a help or a hindrance?
David Norgrove: Well there’s no doubt it helped. The pay of the low paid was protected better than it ever has been, certainly since back to the early 70s, so I think it did its job.
World Finance: As of next year, Germany, Europe’s strongest economy, will implement minimum wage. Why now do you think?
David Norgrove: As I read it, it’s partly a matter of politics. Germany has a very different wage bargaining structure from the UK, with different kinds of arrangements for it.
World Finance: Well the UK brought minimum wage in during a time of prosperity, but Germany is still recovering from the recession, so do you think a shock to the European markets could throw the ship off course?
It seems to me unlikely that minimum wage in Germany will affect the whole European economy in that way
David Norgrove: It seems to me unlikely that minimum wage in Germany will affect the whole European economy in that way, and also Germany actually has been recovering very strongly and growing faster for the last few years. So actually, from a Germany point of view it seems to me they’re introducing it at a point when they’re in a reasonably strong economic position.
World Finance: Do you think the UK then can act as a model for Germany so it can learn from how we’ve implemented minimum wage?
David Norgrove: Well we’ve had people from Germany coming to look at the way we’ve done it, as I’m sure they have at other countries. So they have tried to learn, I think very sensibly, from other other countries’ experience.
World Finance: Well finally you said that minimum wage has no effect on unemployment, but is that the same for youth unemployment?
David Norgrove: The evidence internationally is that a minimum wage is likely, if anywhere to have an effect on young people. That’s why in the UK we’ve got rate for young people which are lower than they are for adults, and in fact the Low Pay Commission with some reluctance over the last few years has held back pay increases for young people out of fear that there was some effect appearing on young people, but we’ll have to judge that over the course of the next year or two as well.
World Finance: So how do you see minimum wage developing then for the UK?
David Norgrove: Well our objective is to raise it as high as we can as a recommendation to government, provided it doesn’t affect employment of the low paid, and we are now seeing quite a strong recovery in the UK, we’ve recommended a much more substantial increase this year than we have done in past years, and we hope very much that we’ll be able to carry on doing that.
World Finance: David, thank you.
David Norgrove: It’s a pleasure.