Waging war

April 5, 1996

The minimum pay debate divides economists, John Davies reports

The minimum wage in the United States has been $4.25 (Pounds 2.85) an hour for the past five years. President Bill Clinton wants to raise it but faces strong opposition. An increase would mean a heavier burden on employers and thus job losses among the lower paid, so the argument goes. Or as Alan Manning of the London School of Economics's Centre for Economic Performance puts it: "Conventional wisdom has it that increases in minimum wages price workers out of jobs."

A debate on the minimum wage was held recently by members of the Royal Economics Society. And to discuss it, a panel was assembled that included economists from both sides of the Atlantic.

From Washington came John Schmitt, a labour economist at the non-partisan Economic Policy Institute. His view is that "moderate increases in the minimum wage are likely to have a zero or negligible effect on the employment of low-wage earners."

Both Schmitt and Manning refer to a study by two Princeton economists of a 1992 change in New Jersey law. This increased the minimum wage in fast-food restaurants. The rise did not happen in the neighbouring state of Pennsylvania, thus providing a useful "control". Even so, there was, in Manning's words, "a lack of negative effects" from a rise in the minimum wage.

In the United Kingdom, unlike the US and most of Europe, there are no minimum wage laws. The wages councils that used to set minimum wage levels in areas such as catering and hairdressing, were abolished in the early 1980s.

So did the scrapping of a minimum wage create jobs? No, says Manning. By applying methodology similar to the Princeton economists' he and his colleagues found "little or no employment gains" from the abolition of the wages councils'.

Patrick Minford, professor of economics at Liverpool University and Treasury adviser, says such "micro studies" prove nothing. "The question is whether the minimum wage contributes to the generally agreed objectives of promoting employment and keeping taxes down," he says, adding that "macro" evidence from Europe shows it does not.

Minford believes that any minimum wage law here would be counterproductive: "It does not save the taxpayer any money, and it loads the bill for helping the poor on to employers."

"If the minimum wage is at a high level it will destroy jobs," concedes Manning. The problem is at what level to set it: Pounds 3.50 an hour would be the equivalent of the minima set by wages councils in the late 1970s. "But if it were Pounds 4.15 an hour - we do not have any experience on which to base a judgment. We've got nothing beyond extrapolations."

All the same, Manning thinks that setting a minimum wage "is not going to do very much to unemployment or indeed poverty, although my view is that it will eliminate some of the gravest injustices. It is just part of a wider debate about whether governments should intervene in labour markets." It is a debate that will not end this side of a general election. Nor indeed a US presidential one.

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