How Ed Miliband’s £8 per hour minimum wage pledge will create jobs

In the run-up to the Labour Party conference, Ed Miliband has announced that a Labour government will raise the national minimum wage to £8 per hour.  It’s an important announcement, and one that builds on Labour’s commitment to ensure that people in work are able to earn a decent sufficiency.

It will be attacked by Tories as a measure that destroys jobs.  But as it happens, increases in minimum wage are among the most studied economic phenomena – there is a huge body of evidence, especially from the US (where states tend to allow minimum wage rates to stagnate and then make significant increases).  The evidence shows overwhelmingly that significant minimum wage increases do not increase unemployment.  And although this may sound counter-intuitive for those with a superficial grasp of economics, the theoretical basis is actually quite simple: it’s because the labour market is nowhere near as straightforward as the market model, in which employers and employees are active in a situation of perfect competition.  The real world just isn’t like that – people don’t simply move jobs to get higher pay, and employers can use their control of the labour market – to use the economic term, monopsony power – to pay workers less than their marginal product. It is the relation of actual pay levels to the marginal product of labour that determines whether a raise in wages will cause unemployment; within that model it is perfectly possible and indeed natural, theoretically, for wage rises to increase employment.

Add to that the fact that increasing wages of the lowest paid will mean a significant increase in consumption, and an increase in the minimum wage can produce a significant stimulus to demand – especially where the increase is met from profit and dividends that are saved rather than invested.  The Tories will no doubt argue that small businesses will be hit, but many of the worst payers – retailing, catering, outsourced public sector functions – are dominated by huge and highly profitable businesses.  To the extent that an increase in minimum wage shifts income from rent on assets to pay for work, it’s a powerful redistributive measure in the face of a rentier economy.

In other words: the Tory who claims that increases in minimum wage will destroy jobs is both ignoring the evidence and showing their inability to grasp an even moderately sophisticated piece of economic theory.

There is a fly in the ointment of Ed Miliband’s announcement: it may be less ambitious than it sounds.  Assuming a 3% rate of inflation, a rate of £8 now will be the equivalent of nearly £9.40 at 2020 prices.  We need more clarity on indexation.  But increasing minimum wage is a powerful economic instrument that will stimulate the economy, potentially create jobs, promote equality and – insofar as it reduces dependency on in-work benefits – reduce public expenditure and help reduce the deficit.  It’s evidenced and theoretically robust – and absolutely the right thing to do for anyone who believes in social justice.

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4 thoughts on “How Ed Miliband’s £8 per hour minimum wage pledge will create jobs

  1. I’ve followed your blog for a number of years and mostly like the mix of critique and evidence you offer. But your post on Friday “Scottish referendum: morning after thoughts” and this one provokes a more critical response (which in a way reflects the extensively disgust for the labour party in some areas of Scotland now).

    In a way, both posts embed the same mindset and its going to cost Labour dear in the next electoral cycle.

    In the first you said:

    “Labour remains the only credible vehicle for delivering progressive politics in Government”

    Well, there is plenty of evidence from the New Labour period to contest that, but specifically in Scotland, (and especially on the West Coast), the concept of Labour as a progressive force is now ridiculous. They are finished, and most on the left in this region are now working out how to ensure that Miliband doesn’t have the problem of being supported by 41 Scottish MPs. We won’t get rid of them all, but they won’t all get back.

    Three in Glasgow are especially vulnerable. Margaret Curran, for her undisguised glee when Scotland ended up with a UKIP MEP, Tom Harris (for the gem about shopping your neighbour if you suspected they were cheating their benefits), Ian Davidson (bayonet the wounded) are all sitting on constituencies that voted yes in substantial numbers. The others in Glasgow maybe safer. But you can add on John McGovern (Dundee) to the list of those who are now at real risk.

    The reason for this is none of them offered the slightest hint of progressive politics.

    Now in this post you say

    “Ed Miliband has announced that a Labour government will raise the national minimum wage to £8 per hour. It’s an important announcement, and one that builds on Labour’s commitment to ensure that people in work are able to earn a decent sufficiency”

    Which is the same problem. The reason why wages are low is that employers can get away with it – employment protection legislation has been dismantled and Unions made powerless. All of course in the vital goal of Labour being ‘business friendly’.

    In both what Labour is saying (& here lets stick with when it appears mildly progressive and ignore the rest of their package), is that ‘we, wise people, hear your pain and will do something about it’. What both the Yes campaign in Scotland and a campaign against low wages based on workplace rights say, is ‘let the people have the power to assert and create their own world’.

    Roger Cook

    • Unfortunately Labour are all we have in terms of opposition to the current incumbents. We need a new progressive party of the left; this may well result from the 2015 election defeat that I see as inevitable.

      There is little doubt that Labours credentials are shot to pieces. Tony Blair’s ‘Third Way’ was mainly a successful stratagem to win elections and hold onto power.
      Nothing of impact was done with the power won. A huge contrast to the negative impact of the 2010 Tories who did not even manage a majority; dismantling and privatisation of the NHS, removal of large pieces of the welfare safety net, creating divisions between poorly paid and unemployed.
      Politics is all about gaining power and using it. New Labour could have used the huge 1997 majority to abolish private education.

      Take the criminalisation of squatting which serves to skew matters even more in favour of the ‘rentier class’.
      Labour supported the criminalisation of squatting bill sponsored by Hove’s Mike Weatherly which became law in 2012.
      Now this would fit if done by New Labour but it was supported by a Labour Party supposedly turning over a new leaf in terms of offering progressive left wing social policies and a fairer society.

      An article in the Guardian sums up.
      “From Saturday, a massively unjust, unnecessary and unaffordable new law will come into force in England and Wales. In the middle of one of the worst housing crises this country has ever seen, up to 50,000 squatters who are currently squatting in empty properties across the UK face becoming criminals, and this because they are occupying abandoned residential properties to put a roof over their heads.” (Joseph Blake theguardian.com, Friday 31 August 2012).

      So we have a situation where squatters are criminalised and jailed. Contrast with a slum landlord who causes serious injury or death through faulty wiring just getting a fine.

      There is no sign that Labours awe of, and cosying up to, vested interest has abated.

      I certainly understand why 45% of Scots wanted to leave the Union though I am glad for the sake of England that they did not.

  2. Many do not understand because they believe Hayek/Friedman flat earth economics that puts the rich has wealth creators,yet the rich have never been so rich & were is the wealth creation,non existent because they put the cart before the horse & the poor horse is ready for the ********yard

  3. In a monosoplistic labour market (a monopoly is where there is one seller, monosopoly is when there is one or fewer buyers, in a labour market firms “buy” labour) an increase in minimum wage can reduce dead weight loss and increase employment, if it is not above the market level. This is from the “free market” theory the Tories endorse.

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