31 July 2007

David B Smith, professor of business and economic forecasting at Derby University, has suggested that the national minimum wage should be revisited.

In an article for the Economic Research Council ‘Does Britain have regional justice or injustice in its government spending and taxation?’ he argues rightly that the economies of the regions of Britain differ and therefore the effect of the same government spending and taxes varies from region to region; and, contentiously, therefore that government interventions, including social benefits and the minimum wage, should vary to fit those differences.

The argument is that, for example, national-level unemployment benefits and welfare benefits in areas of high pay mean people are much better off in work than on those benefits; however, in regions with low pay those benefits may be a disincentive to work; indeed, government transfers of resources to less favoured regions may counterproductively discourage an enterprise culture. I think this is a telling argument and should be explored further.

However, I think it is not just a matter of regional economics; these are people’s lives and pricking the poor and ill to make them more economically productive is an ethically difficult project. There would have to be observable gains for individuals to make it acceptable. The effects of reduced benefits are likely to vary for individuals: for the able idle a cut might well get them into work. I am at a loss to see how a cut will encourage a drug addict or alcoholic out of his distress and into work; for him benefits are a response to his illness not a cause of it.

Smith also argues convincingly that the point at which the minimum wage is uneconomic, pricing out employment, varies from region to region. Those areas with high productivity and high living costs in relation to the average should get a higher minimum wage. And, conversely, the minimum wage should be cut in low pay, low productivity areas.

That means that in the southwest region, including Cornwall, the minimum wage should be cut.

At present the minimum wage is £5.35 an hour for an adult, say about £214 gross a week. I think knocking £15 a week off that in Cornwall and the southwest region is hardly likely to have any discernible effect on people’s behaviour except to make poor people poorer and heighten their perception of social injustice.

I agree there is a case for saying that in London, for example, the national minimum wage is too far low as it does not take into account the economic circumstances of life there; that is the regional injustice. Pay in many jobs already takes into account the noticeably higher cost of living in London. However, I disagree that the minimum wage should be cut from its present level anywhere. It is at a modest level and a cut would be a real-life injustice for working individuals.

I do not believe a modest minimum wage is in reality an economic monster. Yes, increases in it can have an effect on the viability of businesses and the ability of businesses to employ people. However, the government has been cautious and astute in increasing it and in consequence it has not so far damaged the economy. That is the way to go: affordable economic justice. There is also desirable social solidarity in a national minimum, the nation’s ad imissimum of earned wages. The early claims of Conservatives that it was an economic folly that would damage the economy and businesses and employment have proved unfounded and now the Conservative party support it, though that may be due to political realism as much as economic observation. Interestingly, the Liberal Democrats initially toyed with regional-level minimum wages rather than one of national uniform level.

Is anyone listening to Smith’s challenging arguments? The article ‘Gordon Brown to vary minimum wage over UK’ in the Sunday Telegraph for 22 July 2007 suggests that the Labour government is looking at regionalising the minimum wage, varying it from region to region or even locality to locality to reflect the realities of the local economy. That would be a major shift in economic and welfare policy. However, I think the title in the newspaper is bolder than the article which is somewhat indefinite.

It occurs to me that there is, of course, another possible and contentious change: the regionalisation of national pay rates, taking into account local pay in the private sector and the ease or difficulty of recruitment and retention of staff. The Cornishing of current national pay for professionals in, say, education, health, and local government would be downwards. Would it apply to Cornwall’s MPs?

See here for a post on average pay in Cornwall and (un)employment.