Sometimes economics and politics come into conflict. Some economists tell you governments fixing wages higher than the market wage run the risk of reducing the number of jobs. Politics tells you trying to secure higher wages for the many is popular, as none of us likes to see people badly paid.
The economics of wage fixing appears simple. The market should find the lowest wage level for the least productive jobs that are worthwhile for the employer to offer and for the employee to accept. If government says the lowest permitted wage should be higher than the market level, then there will be fewer jobs created and accepted.
The first round effect of a higher minimum wage might therefore be to destroy jobs. The independent body that sets the Minimum Wage has always thought so, and has used this argument to keep the minimum low. We need to ask what of the second round effects?
There may well be better results than the first reaction of a market economist. We need to consider what the winners do with their extra money they get paid. They are likely to spend it, and some of this money will in turn become income in the hands of other people in the same economy. That can help create or protect jobs. Some will be lost to the economy through buying imports. Some of it may displace money that shareholders would otherwise have spent or lent on to others. There could also be a spurt in productivity. Employers do not have to respond to higher wages by cutting jobs. They could respond by boosting skills and output per employee to justify the higher wage.
When Labour first introduced a Minimum Wage Conservative opposed it, arguing that either it would be set at a low level which would do little or nothing to raise wages, or it would be set too high and destroy jobs. Conservatives instead proposed a minimum income, made up of market wages topped up by tax credits. Labour argued against, demanding employers paid more of the minimum income. Labour then went on to implement the minimum income scheme with much extended tax credits, offering effective pay well above the Minimum Income for people who qualified for the credits.
Thanks to tax, tax credits, state employment and state pay and many other government interventions the jobs market and wages are far from the free market of supply/demand theory. Most think that government offering to put the Minimum Wage up to say £25,000 a year or to current average earnings would destroy jobs which is why no party suggests doing it. There is more uncertainty about the consequences of the lesser rise the current government has in mind. I accept we want a better paid workforce, and understand the government’s wish to force the pace. Let us hope it generates the productivity gains and better skills and training it needs to do successfully, without job losses. Big companies can help by working with their employees to ensure they work smarter as they work for better pay.