From the TUC

Government calls for forward guidance on the minimum wage

20 Jan 2014, by in Economics

The government has today published the detail of its final evidence to the Low Pay Commission, which provides some helpful clarity on the facts behind the various headlines of the last few weeks.  While the documentation makes clear that the Chancellor has not instructed the Commission to raise the minimum wage to rise to £7 an hour with immediate effect, the evidence also demonstrates that the government are pushing hard for substantial increases in the NMW, albeit phased in over time.

A key shift in the Government’s position is that the LPC is now being asked to provide ‘forward guidance on the NMW’, and to consider recommending planned increases over ‘two or more years to ease adjustment’.  Along with a Treasury analysis which considers the economic impacts of a NMW rise to £7, this could be read as a strong hint to the LPC to draft forward guidance which sets out a timescale for the NMW to return to its 2007 real terms value (presumably, as with the Bank of England’s guidance, subject to certain conditions).

The paper also points the LPC to making less of the ‘bite’ (the NMW as a proportion of median pay) suggesting that if the employment rate and the weekly earnings of NMW workers are rising (ie jobs are increasing and hours are not being cut) and if the ‘product wage’ (the total employment costs employers face when NICS, pension contributions etc are included) is falling or stable that it may well be possible to increase the bite without significant employment effects.  Given these conditions are all currently in place, the evidence appears to be hinting strongly that the NMW could rise substantially faster than average earnings.

The analysis also points the LPC to consider that ‘when unemployment is already falling towards the 7% threshold, identified by the Governor of the Bank of England as triggering a tightening of monetary policy, the employment impact of changes in the NMW may in any event be less of a pressing concern’.  The implication seems to be that even if there were some employment impacts from a strong NMW rise, a strengthening labour market could offset them.

This BIS evidence is supported by a paper providing an analysis of the fiscal benefits the Treasury could expect were the NMW raised to £7 an hour from 2015/16 (a politically interesting target and date). Perhaps surprisingly, given the Chancellor’s choice to reference the potential of a £7 rise last week, this paper reads as if it has been written as a rebuttal to those who claim that raising the NMW could lead to significant savings in social security expenditure (which may mean that it is aimed at DWP Ministers as much external critics).

The  paper concludes that while many people have made attempts to model the fiscal impacts of a higher NMW they have used ‘static’ models which don’t take into account wider impacts such as employment effects, increased inflation and reduced profits. Given this, the Treasury have developed their own model which looks at ‘dynamic’ effects to 2018/19, claiming this shows that it is unlikely there would be any large positive fiscal impacts from increasing the NMW.

The debate as to the accuracy of this analysis will go on, but the politically important point is that this paper is clearly not a statement from the Chancellor that he thinks the NMW should be £7 an hour.  However on the other hand, while talking down the fiscal benefits of higher pay this is a strong piece of government analysis which suggests quite strongly that a substantial NMW rise would not cause significant economic damage. The HMT modelling suggests that if the NMW were raised to £7 over the next two years the employment effects would be limited to a 14,000 rise in unemployment above existing forecasts and also leaves open the possibility that the employment impacts could be nil. With such small jobs effects, it is quite feasible that were the Treasury to announce measures which it felt would help firms with any additional costs that the entire Government could move to a position of being supportive of a sustantial NMW rise by 2015/16.

It seems that BIS and HMT are in some agreement on the overall government message. The HMT paper assumes ‘firms are forward looking and are assumed to make the adjustment to their workforce over a three year period, starting from when the policy is announced’. This implies a forward looking policy announcement, and reinforces the wider BIS evidence paper which asks the LPC to provide forward guidance. And it is also interesting that the Government’s  baseline assumption in the HMT analysis (before any ‘faster increases’ are included) is that the NMW will be at least £6.71 by NMW year 2015/16,  a 6.3 per cent rise from now.  Given the government wants a ‘faster rise’ we can infer this means above 6.3 per cent over the next two years – a rate that is substantially quicker than of late (although not enough on its own to make up real terms losses).

There is much more to take from these papers (including their recognition of the limited benefits further uplifts in the personal allowance will bring for low waged workers) but the most important point with respect to the NMW seems to be that it is now the government’s view that the rate can rise substantially faster than has been the case in recent years without negative economic side effects, and that the government would like to charge the LPC with plotting out such a transition. Whatever the excesses in political spin that it has taken to get to this stage, this is a welcome development with potential to make a significant difference for low paid workers across the UK.  The TUC has made its case for a strong NMW rise and today we were glad to find out that the government agrees with us.