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IEA: Scrap minimum wage to tackle youth unemployment

The government has announced a £1bn scheme to get unemployed young people working again. But will it work? Mark Littlewood of the Institute of Economic Affairs argues the case for a very different solution.

The number of unemployed young people tops the one million mark and Nick Clegg is on hand with a solution – he has found £1bn to encourage businesses to put them on the payroll.

The Liberal Democrats proudly boast that they have talked their Conservative allies into embracing this policy, a feat of internal coalition diplomacy likened by a Lib Dem spokesman to persuading a ‘vegetarian to eat a kebab’.

Nick Clegg’s Youth Contract will apparently offer any private sector business willing to take on a young person a grant of over £2,000, but only if the new employee has been claiming welfare for the previous nine months. He hopes that hundreds of thousands of people can be helped by the scheme.

Reform the National Minimum Wage

Well, the Deputy Prime Minister may have sold this plan to his Tory colleagues, but he hasn’t sold it to me. When someone smashes something up with their right hand and rather feebly tries to put the pieces back together with his left, you don’t sit back and applaud. You criticise the individual for getting involved in the first place.

Nick Clegg’s policy amounts to an implicit acceptance that the National Minimum Wage (NMW) is pricing people out of employment. This is hardly surprising. With the NMW edging up to £6.08 per hour and the age qualification for the top rate being lowered to 21, it stands to reason that there will be jobs that would be created in a free market which are tragically rendered illegal by government regulation.

Those looking for their first step on the career ladder are hit the hardest and are being left to rot on the unemployment scrapheap. We can’t be sure how many full-time jobs would be available at about £11,000 a year (a figure a little below the full time NMW rate), but it seems absurd to argue that the total number would be zero.

It may be one heck of stretch to provide for a family on that sort of salary, but for a young person, perhaps still living with their parents, it represents a much better life chance than no work at all.

Clegg’s Youth Contract isn’t the solution

So, the Clegg policy is effectively to subsidise the minimum wage, rather than to muster the political courage to scrap it. No doubt some jobs will be created as a consequence. But it’s far from an ideal approach, as it establishes all sorts of perverse incentives which could be avoided if the NMW was simply reduced or abolished.

For example, if I’m looking to recruit a young worker and my ideal candidate has only been claiming Jobseeker’s Allowance for six or seven months, rather than the prescribed nine months, I’d be strongly tempted to delay their appointment to qualify for the Clegg subsidy.

In normal circumstances, that would be a ludicrous and counter-productive decision for both employer and employee, but the distorting impact of this programme may make it the best decision for the business to take after all.

Nick Clegg receives half a cheer for recognising that many young people are being priced out of the jobs market. But he also receives a deep groan for conjuring up a complex, convoluted and bureaucratic response to the problem.

Which? Conversation provides guest spots to external contributors. This is from the Institute of Economic Affairs (IEA) – all opinions expressed here are its own, and not that of Which?

Comments
Guest

Unions now want something like £7.00 as the minimum wage. They are never happy. I can remember when the minimum wage came into effect it was something like £3.50 and the unions first reaction was that they would not rest untill that figure was £5.00. Whereas I think a minimum wage is very important one can not go too high as has been shown by most of our manufacturing (many jobs) going abroad. The unions never know when to stop doing in the end more harm than good.
I think it would be a very good idea to lower the minimum wage for young people as the majority lives still at home so they stand a higher change of employment.

Guest
Steve57 says:
29 November 2011

David Cameron is looking for a silver bullet to change the balance of the economic crisis and it simply is the National Minimum Wage.
Oh yes a few might be paid a bit less but think of the benefits;
Jobs for the people at the bottom of the employment ladder
Reduced cost of living
Real economic growth without borrowing
Freedom for people to realise their own destiny

Its a no brainer, but the politicians are scared of the public outcry, but no one will thank them if this mess isnt sorted out soon.

Guest

There is a lot of sense in this view.
When I started work at 15, I was on low wages, with age and experience this slowly increased.
After 17 years of work, the minimum wage was introduced.
I was training staff how to do various jobs/tasks, who only came in for 12 hours per week without my experience. They were being paid a few pennies an hour less than I was.
It was demoralising.

This is just one area that needs looking at. It has to be combined with others into a whole package.
The emphasis on cheap borrowing for business baffles me.
Should those in power (of all colours and persuasion) not be aiming for a UK that can afford to live by its wages alone?
Should business not be investing profits to grow and not be needing to take on yet more borrowing?
In 2010 there were 21 Million reliant on a form of tax credit – clearly unsustainable, no matter how well intended
Bank bailout/guarantees/printed money to the tune of over £20,000 per voter – think of the good that could have done if given to hard pressed families, paid off credit cards, loans, other debts, etc. The battle for this refinancing for the people would have created competition in the market place as businesses fought over sales, investments, etc. Which would have improved rates for savers and genuine prices for custom, more private sector jobs, bringing in extra tax revenue with it.
Most households would have been left on a more secure footing with the cutbacks to come. Many would have paid down debts, the bailout would, had those in power got their act together and genuinely looked out for the people that elected them, be understood and the need for cutbacks now and in the future would have been much more palletable, even if difficult.

So what now?
Every single thing, regulation, law,voluntary code that is introduced to protect the people, always ends up costing the people more.
We don’t manufacture anything anymore.
Prices are at record highs, people are paying £40 and more, per week just to get to work, whilst their wages are falling with below inflation rises. The monopoly position of supermarkets after years of favourable planning consent, are costing us all in the pocket as they use demographics to price rather than the price it costs them to put the goods on the shelf.
Petrol stations are taking more profits from those who need to fill up than they have ever done, yes the government of the day are getting revenue from it all, but increased profits by the station owners isn’t helping.

Once upon a time, many prices used to rise or fall once, maybe twice a year when budgets were announced. Now they are going up on a weekly basis. This cannot continue.
Personally, unless there is a considerable change of personnel in parliament or a sudden shock that opens the eyes of those representing us, I cannot see a way out of this mess.
I think that this minimum wage idea is a valid option, perhaps if it puts us on a competitive footing to bring in new investment and industry from outside, giving us advantages over competitors, we may just benefit from it and find a way out of the mess we are in?

Guest
moaner says:
30 November 2011

Having been a participant in Maggie Thatcher’s YTS (youth training scheme) or as it soon came to be known amongst it’s victims (young trainee slaves), I think they will have to look at it very carefully to stop big businesses’ having a full time worker doing a job that deserves a full pay packet but being paid peanuts for it. I was paid 98 pence per hour. I had to pay some travel costs, buy a suit (£70) and shiny shoes (£20) taking over 92 hours to pay back my parents and give them £10 per week. Deal with obnoxious people on the phone and in the office who all knew what I was and what I was paid and obviously enjoyed treating me like dirt. The deal for the company was that after six months they had to pay us the going rate for the job, i.e. the same as everyone else. What they usually did however was sack us and get a new one so they could carry on the slave labour with full government approval. Ahh, childhood memories.

Guest

I don’t think paying companies to take on young workers is the solution (esp. because it is unfair to use taxpayers money to prop up businesses) but I’m honestly outraged that someone would suggest scrapping the national minimum wage! I’m not British and having lived in other countries before I already find that pays in the UK are horrendous. I would easily earn more had a decided to work in France, Belgium or the Netherlands. What you’re essentially advocating is legitimising businesses using even cheaper labour (as they already do with interns). The last thing I want if I’ve spent money and time getting a degree is having to work hard for an outrageously low pay.

What surprises me is that there hasn’t already been an exodus of young people simply moving abroad as, clearly, it is already hard enough to find a job in the UK and if you find one you have to put up with having your rights as an employee curtailed simply by virtue of your age. The same goes for students – why pay £9,000 a year and then be forced to take a job at below NMW if you can study abroad for less money, learn a language and get a job elsewhere?

I know there aren’t much jobs around in most countries but the UK seems by far the worst!

Guest

Nisha,
Unfair to use taxpayer’s money to prop up businesses? – We already do!
The taxpayer bails the banks and provides cheap finance for businesses to borrow.
The two power house economies in recent years both have no minimum wage – China and India
Is there anything we buy today on UK shelves that’s not from one of these two nations in some part?

I am not advocating cheap labour, but many complain (myself included) of a lack of manufacturing. If it is cheaper to make something on the other side of the world and ship it to the UK, than it is to make something 50 miles away, something is wrong.
There is also the fairness issue.
Is it right that someone with 10 years dedication, training, experience, committment, etc, should see a person start work in the same shop/office/warehouse etc, and be paid almost the exact same wages?
It adds insult to injury when this experienced person also has to train the new worker whom is being paid similar wages.

It is nothing to do with age, it’s about making the UK competitive again in the world, so we can generate wealth for the people here by making things to sell around the world, which brings in much needed trade which in turn increases the number of jobs available.
Yes there will always be those companies that abuse the system, but this is exactly the same as is happening today, even with the minimum wage.
With safeguards put in place when wage law is changed, this should eradicate the problem to some degree and get the UK moving again.

Guest

Hi frugal! In your example, surely the solution should be not to make the younger person worse off but to make the experienced person better off?! How a race to the bottom benefits anybody is not clear to me at all. We can’t compete with China and India on price and never will. And as those nations develop, their workers too will be demanding better rights and better pays. Whether they can remain competitive then I’m not too sure of.

I don’t think we should lower standards at all cost. The economy doesn’t necessarily benefit either if people earn so less they can’t actually spend it on anything. Low income is one of the reasons this nations is so indebted as people have to even take out loans to cover basic bills – is that right? People should be given a living wage – no matter what age they are and what experience they have.

Guest

Nisha, solution to not make younger person worse off but to make experienced person better off – couldn’t agree more.
I fought for this and lobbied my MP when the minimum wage was introduced, predicting this very instance should remain. Part of the initial problem has been that the gap between the part timer (in my retail example) who comes in with no experience, had a wage rise from the minimum wage to within a few pence to the experienced member of staff, ie, myself.
My wage went up by under 50p yet the minimum wage pushed up the new employee’s wage by over £2. The gap wasn’t maintained and I was told by the national company I worked for at the time, we simply do not have the money to maintain this gap with the demands put on us introducing the minimum wage.
This scenario is not confined to “young people” it applies equally to those engineers who lost jobs and now work nights stacking shelves for a supermarket, etc.

In times of great cost for transporting goods, with all the carbon taxation as well, we should be able to compete in the market place with China and India. Yes as they develop it will get harder for them to be competitive. The question is, do we have the time to wait for their workers/government/unions to catch up?
With the ever growing black hole of the eurozone getting closer to home, I don’t believe we can afford to sit still and wait.

The post suggests a lowering or adjustment of the minimum wage. I agree.
It is a common view that the economy doesn’t benefit if people earn less, I would beg to differ.
You own a business, you can afford 2 staff on the current minimum wage or up to 4 people on a lower minimum wage. Which is more beneficial?

Under the minimum wage as it is – can you compete on price, whilst having your hands tied behind your back?
Surely you would agree that the option of having 2 staff, maybe take on a 3rd for busy periods or even stick with 2 and use the savings to lower your prices making your business more competitive, is more beneficial to your business, the jobs market, etc?
With a lower minimum wage your business would have options/choice, you could take on 1 or 2 new workers and train them in skills needed for your business.

Low income (for the most part) is not one of the reasons this nation is so indebted.
Even with the minimum wage as it is now as you advocate and at 2010, with 21 million people reliant on a form of tax credit to survive (this cannot go on, it is totally unsustainable), people still cannot afford basic bills, this is not due to low incomes it is down to a borrowing habit.
Businesses today are built on borrowing instead of profit. They used to grow gradually, in recent years they have been given cheap borrowing, used pension funds, etc, to grow faster.
In short many of today’s businesses are built on sand.
Now that borrowing is more expensive, these extra costs are factored into their prices. We, the customer, are paying the price.

L