Britain's Tories Become the Workers Party

(Bloomberg Opinion) -- There’s a new political battleground in British politics, and it’s one workers will like.

Boris Johnson’s ruling Conservatives and Jeremy Corbyn’s opposition Labour Party are sparring over who will raise the country’s minimum wage highest and fastest (and over how many people will benefit). The U.K.’s recent experience with implementing a “National Living Wage” suggests it needn’t have negative consequences for the labor market. Nevertheless, the past is not always a useful guide to the future — especially with the economic consequences of Brexit so uncertain. Lift the minimum wage a notch too high, too soon and a policy success could easily become a mistake.

In his speech at the Conservative Party conference in Manchester on Monday, Chancellor of the Exchequer Sajid Javid set out an ambitious plan to end low pay over the next five years, claiming the Tories were now the real “workers party” of Britain.

It’s not quite true that Javid’s economic platform, laid out in expectation of an imminent general election in the U.K., was as radical or worker-friendly as the one put forward by Labour at its own conference last week. But his plan to take the National Living Wage to two-thirds of median earnings by 2024 would on current forecasts equate to 10.50 pounds ($12.93) an hour. That’s one of the highest levels, if not the highest, in the developed world. Javid also said he would bringing the age threshold for qualification down from 25 today to 23 in 2021, and to 21 in 2024.

While Philip Hammond, Javid’s predecessor, vowed back in May to end low pay, the current chancellor has upped the ante in trying to outbid Corbyn and his shadow chancellor John McDonnell. Johnson is targeting Labour’s industrial heartlands, many of which voted for Brexit, in the forthcoming general election. McDonnell’s plan is to lift the National Living Wage to 10 pounds an hour as early as 2020.

For all the complaints from employers and the uncertainties of Brexit, the race to offer working Britons a better deal is on.

The recent experience of the British labor market is in many ways reassuring. In 2016, the then Tory chancellor George Osborne stunned his political opponents by announcing the introduction of the National Living Wage for the over-25s, which would reach 60% of median earnings by 2020. This was far more ambitious than what had been asked for by the country’s Low Pay Commission, an independent body tasked since 1998 to set minimum wages.

For all the initial skepticism from business, Osborne’s gambit was a success. The Resolution Foundation, a think tank that looks at low pay, has found that the percentage of employees paid less than two-thirds of the median hourly pay fell from 20.7% in 2015 to 17.1% in 2018. And there have been no big detrimental effects on employment, which one might expect in the event of excessive pay hikes. The U.K.’s overall employment rate has reached 76.1%, the highest on record. The average number of hours worked by those on the minimum wage has also increased since 2016, although there have been some signs of lower employment among low-wage, part-time women.

There’s also evidence that supports the expansion of the policy. Arindrajit Dube, an economics professor at the University of Massachusetts Amherst, who was tasked by Hammond to examine minimum wages in the U.K., said in May that plans to increase it could be manageable. He looked at the experience of some large U.S. states and found that the number of low-wage jobs remained broadly unchanged during the five years after an increase, while living standards improved for some of the poorest families.

Still, there’s need for caution about the ambitious targets of Labour and the Conservatives. These are significant hikes, so it’s hard to be certain that they won’t have a detrimental effect on employment. It’s better therefore to have a framework that allows the minimum wage to be lowered as well as increased. Leaving sufficient autonomy to the Low Pay Commission appears the most sensible approach.

Such prudence appears warranted with Brexit around the corner. Javid reiterated in his speech that Britain will quit the European Union at the end of this month, with or without a deal. An economically damaging departure would have dramatic consequences for the U.K., including its labor market. While the Tories have an election to win, it is unwise for politicians like Javid to determine policies that might be overtaken by a supply shock after an unmanaged Brexit. That unhappy outcome would have an inevitable effect on pay and productivity.

British politicians must stop doing things in the wrong order. Brexit may be tedious, but it’s dishonest to tell voters what will happen next without knowing what form it will take.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Ferdinando Giugliano writes columns on European economics for Bloomberg Opinion. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Times.

©2019 Bloomberg L.P.

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