Scott Sumner  

Britain's new minimum wage: Is there a hidden agenda?

Two concepts of "austerity"... A Question for Juris Doctors...

This report in the Financial Times caught my attention:

George Osborne has delivered Britain's first radical Tory Budget for nearly 20 years, announcing huge welfare cuts offset by a higher minimum wage in a bid to create a "high wage, low tax, lower welfare" economy.

In a Budget that slowed the rate of austerity over the next five years while still seeking a surplus in the public finances by 2020, the chancellor hit buy-to-let landlords restricted non-dom tax status and increased dividend taxation for the wealthy.

He also introduced a new national living wage from next year at £7.20 an hour which will reach £9 an hour by 2020.

In other revenue raising measures, Mr Osborne said he would introduce an 8 per cent surcharge on corporation tax on profits made by banks and, in return, would gradually reduce the bank levy over the next six years and apply it only on UK balance sheets.

In the longest list of budgetary measures in many years, Mr Osborne outlined a roll back of the state that Tory activists have long desired.

Why would a Conservative government sharply increase the minimum wage, in a budget that in many other respects favored small government? The minimum wage is currently 6.50 pounds/hour, and 9 pounds/hour is almost $14/hour in US terms. Also recall that average incomes in the UK are lower than in the US. It can't be just politics, as they just had an election, and are 5 years away from the next one.

A few months back a commenter suggested that the new German minimum wage was aimed at cutting immigration from poorer EU members such as Romania and Bulgaria. Britain is also seeing a fairly large wave of immigration from Eastern Europe, and the Conservative Party seems to be increasingly opposed to high levels of immigration. Could this be aimed at slowing immigration?

Also note that many of the Eastern European immigrants are young adults, who would be covered by the minimum wage. Britain has a set of far lower minimum wage rates for teens:

The following rates apply as of 1 October 2014:

£6.50 per hour for adult workers (21+)
£5.13 per hour for 18-to-20-year-olds
£3.79 per hour for under-18s who have finished compulsory education
£2.73 per hour for apprentices under 19 years old or 19 or over and in the first year of their apprenticeship
Those who have not yet finished compulsory education have no entitlement to NMW.

Presumably most 15 to 17 year old workers in the UK are British citizens.

And that makes me wonder about the new $15 minimum wage (being phased in) in Los Angeles. Would most of the workers priced out of the LA job market by a $15 wage be American born whites, or recent immigrants from Latin America? Maybe that's just paranoia on my part, but consider:

The business-friendly National Center for Policy Analysis points out "the 1931 Davis-Bacon Act, requiring 'prevailing' wages on federally assisted construction projects, was supported by the idea that it would keep contractors from using 'cheap colored labor' to underbid contractors using white labor."

African-American economist Thomas Sowell with Stanford University's Hoover Institution gives an uncomfortable historical primer behind minimum wage laws:

"In 1925, a minimum-wage law was passed in the Canadian province of British Columbia, with the intent and effect of pricing Japanese immigrants out of jobs in the lumbering industry.

A Harvard professor of that era referred approvingly to Australia's minimum wage law as a means to "protect the white Australian's standard of living from the invidious competition of the colored races, particularly of the Chinese" who were willing to work for less.

In South Africa during the era of apartheid, white labor unions urged that a minimum-wage law be applied to all races, to keep black workers from taking jobs away from white unionized workers by working for less than the union pay scale."

Thank God that apartheid has ended. Unfortunately some of its negative effects persist. Here is the New York Times:

NEWCASTLE, South Africa -- The sheriff arrived at the factory here to shut it down, part of a national enforcement drive against clothing manufacturers who violate the minimum wage. But women working on the factory floor -- the supposed beneficiaries of the crackdown -- clambered atop cutting tables and ironing boards to raise anguished cries against it.

"Why? Why?" shouted Nokuthula Masango, 25, after the authorities carted away bolts of gaily colored fabric.

She made just $36 a week, $21 less than the minimum wage, but needed the meager pay to help support a large extended family that includes her five unemployed siblings and their children.

The women's spontaneous protest is just one sign of how acute South Africa's long-running unemployment crisis has become. With their own industry in ruinous decline, the victim of low-wage competition from China, and too few unskilled jobs being created in South Africa, the women feared being out of work more than getting stuck in poorly paid jobs.

PS. The Democratic surge of interest in the minimum wage occurred soon after the GOP surge of interest in immigration restriction. Let's see if the GOP jumps on the minimum wage bandwagon.

Comments and Sharing

COMMENTS (13 to date)
Hazel Meade writes:

It's an appealing theory, but illegal immigrants don't get paid minimum wage as it is.
If anything, raising the minimum wage creates an incentive to hire more illegal labor and do more work under the table. That carries risk, but you've just raised the cost of doing it the legal way, so you've increased the relative utility of doing it the illegal way. And illegal immigrants are already living an off the books lifestyle and can't go to the police to report you, so once you decide to break the law, you would have a positive preference for illegal aliens over white Americans.

Thus personally I suspect it would cause more unemployment amoung poor whites and an increased demand for illegal immigrant labor.

Chris writes:

Minimum wage laws also disadvantage the undereducated/less productive/less disciplined individual(s). Why employ a low-skilled pleb, when a university graduate will work for the same wage?

I suppose Britain has to do something with the unemployed graduates(!).

Andrew_FL writes:

@Hazel Meade-You just said pretty much what I was going to say. However, that raising the minimum wage would actually favor illegal over legal immigrants, does not necessarily undermine Scott's story, as long as the politicians favoring a higher minimum wage don't realize that.

Also I wouldn't have said white or poor Americans would be the ones put out of work. Actually, more African-Americans and teenagers-especially teenagers.

Matt Moore writes:

In the UK case, the vast majority of immigrants from Europe are legal. EU membership means the government cannot stop them directly, so Scott's analysis makes sense.

In one sense he is mistaken though. This is politics. Although Labour is comprehensively defeated, Osborne has a tough fight to succeed the PM, who had already said he won't lead the next election. Today's budget already has the 'George as PM' narrative running.

E. Harding writes:

Scott, I'm amazed you haven't heard of Ron Unz and his case for a $12 minimum wage, deliberately meant to discourage low-skilled legal immigration.

Adam writes:

I suspect you may be right. The current UK government has a big challenge to meet it's anti-legal-immigration pledge, given the sancrosanct principle of free movement in the EU and the rosy state of the UK employment market. It's trying to hit immigrants financially, by removing their access to some welfare benefits (including re-defining parts of the tax system as "benefits").

Now, maybe a plan to deliberately cause unemployment amongst the people who they don't like. Other people have proposed this explicitly-ish before...


Scott Sumner writes:

Hazel, The migrants in Britain are generally not illegals, the EU has free labor mobility.

Matt, Interesting, but isn't the budget a mixture or left and right wing provisions? Which of them appeal most to Tory MPs?

E. Harding, Ah yes, I do now recall reading that a while back, but I completely forget. Yes, it would have improved the post. Thanks.

Adam, Interesting.

BTW, although I disagree with the Tories on immigration, I do have some sympathy. As you know, many of their voters oppose big new housing projects in the suburbs for reasons of congestion, and of course England is far more densely populated than the US. It's a tough issue for the Conservatives.

Nick Bradley writes:

maybe they're raising the minimum wage because they've concluded its a good way to reduce inequality (marginally) without increasing spending...

AntiSchiff writes:


My sense is that the Tory leadership tries to base policy decisions on empirical evidence, and they may have looked at more recent research on minimum wages and concluded that such an increase won't have a great negative effect on employment.

I know you disagree about the magnitude of effect andb I'm not saying you're wrong, or that slowing immigration might not be a motive. It's just that I've seen a Tory conference on behavioral economics, for example, and how it might be applied in public policy. These people actually do try to think.

Which makes them far superior to the Republican party, by the way.

Matt Moore writes:


Tory MPs are increasingly practical. They will vote for the leader most likely to deliver victory. The contest might be less than 2 years away.


Actually, Osborne gave precise estimates of the numbers he expects to be made unemployed as a result of the minimum wage increase. He argued that the overall benefit was positive anyway. Intellectually honest anyway, no magical thinking.

Scott Sumner writes:

I'm not sure whether those comments should make me think more highly of the Tories, or less highly. I guess it depends whether you place more value on wisdom or honesty.

mico writes:

I think it really is just politics. The new wage will only apply to over 25s, so it won't increase unemployment that much (the Office for Budget Responsibility estimates by about 60,000). Minimum wages mostly hit the young.

Bear in mind that although everyone will probably have forgotten about this in five years time, it does soften their image while at the same time forcing Labour to be more and more extreme in order to differentiate themselves. Since most people think Labour lost the election by seeming to be too leftwing, that might be significant. And they are having a leadership election right now, so a leftward lurch forced today might well stick for five or even ten years.

Britmouse writes:

I agree with comments above: it's pure politics, this Budget is aimed at keeping Labour out of office for more than just a decade and not much else. It aims for small G/GDP but a highly interventionist government - a reverse Scandinavia?

This FT article today is potentially an important caveat on the minimum wage hike: Osborne catches Low Pay Commission off guard.

While the 50p rise next year seems to be decided by Treasury fiat, the Low Pay Commission which sets the minimum wage may have retained some discretion about how to hit £9/h beyond that. The LPC is supposed to take into account (i.e. avoid) disemployment effects, so it will be "interesting" to see how this plays out.

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