Five years before the US introduced its first national minimum wage in 1938, president Franklin Delano Roosevelt declared that “no business which depends for existence on paying less than living wages to its workers has any right to continue in this country.” Almost a century later, policymakers in a range of countries are turning to minimum wage policies to help improve the lot of low-paid workers. But while the minimum wage is an important policy lever, it is too narrow on its own to deliver everything politicians might want to achieve.
In the UK this week, the Treasury announced the minimum wage for over-23s would rise 6.6 per cent to £9.50 an hour next year, the sixth year of rapid increases implemented by Conservative governments. In the US, president Joe Biden this year raised the minimum wage for federal contractors to $15 an hour. In the EU, Brussels has proposed a directive on adequate minimum wages in member states.
There is good reason for this enthusiasm. Empirical evidence from a number of countries suggests that, at least when set below 60 per cent of the median wage, minimum wages increase pay without severe effects on employment levels. In the UK, for example, increases in the minimum wage now mean that just 14.2 per cent of employee jobs are low paid (defined as less than two-thirds of the median) — the lowest proportion since at least 1997 when the data-series began. Yet the rising wage floor did not stop a jobs boom which propelled employment rates to record levels pre-pandemic.
Germany’s introduction of a minimum wage in 2015 also reduced inequality without any substantial effect on either unemployment or employment, research has found. There is evidence it helped to boost productivity by driving workers from small businesses to larger, more productive companies.
But the minimum wage in isolation cannot fix other problems in the underbelly of labour markets such as poor conditions and insecure schedules — indeed it can even make them worse. In the UK, there is some evidence the rising minimum wage has encouraged employers to increase their use of zero-hours contracts, where people’s hours can be changed at short notice to save the company paying for idle time. The growth of gig economy platforms has also denied many workers the minimum wage and other employment rights by defining them as self-employed, though court judgments in a number of countries are now pushing against that trend. Several strikes in the US this month highlight the importance to workers of problems beyond just pay, with protests over seven day weeks and compulsory overtime among other issues.
Non-compliance is also a problem. In the UK, data in 2019 suggested slightly more than 440,000 workers were paid less than the minimum wage, accounting for just over a fifth of workers “covered” by the rates. Yet there have only been 15 criminal prosecutions for underpayment since 2007. Poor enforcement allows unscrupulous businesses to undercut the majority of decent employers who follow the rules. In the textiles district of Leicester, for example, legitimate manufacturers struggle to compete with sweatshops paying as little as £4 an hour. In spite of regular media attention on the problem, the government’s lists of employers caught underpaying workers have featured only five textile companies since 2017, and only one in Leicester.
Minimum wage laws are a useful tool in policymakers’ armoury in the post-pandemic era. But they only work when they are enforced.