Mysterious Maneuvours in Britain

On the surface, British politics appears to have turned on its head.  Tory Chancellor of the Exchequer George Osborne surprised all recently by grabbing an issue from the left and calling for Britain to adopt a national living wage (NLW).  Even stranger, Osborne’s seeming leftward lurch evoked resistance from the left, sometimes with arguments traditionally used by the right.  The Guardian, a left-leaning organ if ever there was one, has gone so far as to remind its readers that high minimum wages can constrain job prospects for the most vulnerable while benefitting second earners in sometimes well-off families.  The seeming switch in party positions is enough to create a feeling of vertigo.

A little digging, however, puts things back into their usual places, or at least closer to them.  It is, after all, not beyond this Tory leadership to stymie its opposition by stealing a political issue.  Prime Minister Cameron’s push for a referendum on Britain’s EU membership did just that to UK Independence Party (UKIP) as the country approached the 2015 general election.  But even apart from cynical political ploys, a closer examination of the government’s budget reveals something much more classically Tory and much less left leaning than it appears on the surface.  Set in context, in fact, the NLW looks more like an integral part of a general plan to curtail welfare and other support programs while promoting work, productivity, and the expansion of British business.

To be sure, the NLW, taken in isolation, does have all the hallmarks of a classic policy of the left.  It raises the minimum wage from £6.70 ($9.72) an hour last year to £7.20 ($10.44) this year.  Given the country’s low rate of inflation, this 7.5 percent jump constitutes an impressive increase in real wages.  The NLW will then rise an additional 25 percent in stages to £9.00 ($13.05) an hour by 2020.  The objective, according to the chancellor, is to raise the minimum to 60 percent of Britain’s median wage, making it much higher than at present and in fact the highest relative minimum in the world.  According to government estimates, these changes will benefit some six million workers.

Whatever else the Tory’s intend, the wage hikes will also have the usual ill effects on employment practice and levels.  Already, British employers have taken steps to ease the strain on their respective bottom lines, variously cutting back on worker perquisites, overtime, and Sunday pay, this last in noteworthy cases from double time to only time and a half.  As is typical in such situations, British employers will no doubt seek further relief by shedding workers whose productivity falls short of the new higher wage, either by cutting back on the scale of their businesses or by replacing workers with labor saving equipment.  This sort of shift has already occurred in the United States where states and cities have suddenly imposed new, higher minimum wages.  In Britain, the non-partisan Office of Budget Responsibility estimates that the NLW will, even in its immediate phase, cut at least 60,000 jobs out of a workforce of about 30 milli

The expected number of job losses would have been greater had not Osborne’s measures included an important nuance.  Until now, the nation’s minimum wage applied to all workers over 21.  That old law had made an age distinction in wise recognition that a high minimum can block job prospects for young workers where inexperience and lack of training frequently make it hard to justify pay at even the minimum.  Government publications have repeatedly pointed out that over half the young work at the minimum but only about 5 percent of the overall workforce does.  This new law, no doubt in recognition of the greater demands of modern production for training and skills, builds on this distinction. The increases quoted above and in all the headlines apply only to workers above 24 years old.  A lower minimum will prevail for those between the ages of 21 and 24 and still lower minimums for younger workers.  All are scheduled to rise from last year’s levels, but the youth minimums increase along a shallower slope than the more general NLW.  Had the government applied the new levels universally, as minimums often do in the United States, the job-loss estimates would no doubt have been much higher.

This kind of careful attention to employment effects points to the more general pro-work, pro-productivity nature of the government’s measures.  They ease the strain of higher wages on business, and presumably on employment levels, by allowing shops to stay open for longer on Sundays and, critically, by cutting corporate tax rates from 28 percent to 17 percent over the next four years.  They give still more help to small businesses by excusing them from paying as much as previously into national insurance.

Having given employers the wherewithal to pay higher wages, the law also clearly aims to push the population toward work and away from government support.  Higher minimums, of course, make work more attractive.  So also does the law’s provision to increase by some 13.6 percent the amount a worker can earn before he or she pay any income tax.  To reduce the attraction of life on government support, the law limits child tax credits to only the first two children, freezes the amount paid in jobless benefits, pays less to the disabled, and caps at lower levels the total benefits a family can claim.  The law also ends the ability of young people to move, as some have, directly from school to jobless benefits.  Now 18-21 year olds get no such option.  To paraphrase the chancellor’s statement, they either will go to school, enroll in a training program, or find work.

Something more comes through, less in the policy changes themselves then in the language surrounding them.  The great concern shown about Britain’s relatively high proportion of low-wage workers speaks to a desire in all this to upgrade both the skills and the productivity of the average British worker and so also the mix of Britain’s production in the direction of more-complex, higher value goods and services.  To this end, the law leans on employers to dedicate more resources to training.  Also in this context the goal to raise the minimum to 60 percent of the median wage implicitly reveals a parallel goal to raise the proportion of the workforce in skilled enough work to earn well above the minimum.

Whether the NLW and Osborne’s other measures can achieve their goals will remain an open question for some time to come.  As one prominent British economist said, the country has passed “into uncharted territory.”  Succeed or fail, however, it all looks very different from the $15 minimum sought and put in place by some states and cities in this country.  These simply reflect a political pipe dream that government can force business to continue to pay workers more than they produce.  The government in Britain clearly is going down a different road.




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