by Drew J Jones
Sat Nov 18th, 2006 at 01:56:54 PM EST
Last month The Economist published a story on the minimum wage in the UK, which, on October 1st, reached £5.35 per hour, or, at the time, $10.08. (The dollar figure has probably risen since then, given sterling's small gains since the Bank raised rates to 5% last week, as well as the fact that the UK is now nearly doubling America on GDP growth, but I haven't checked the exchange rates in a few days.) As an American, this is, of course, a stunning figure to me, even more so given Britain's moderate, albeit rising, unemployment rate.
The staff at the magazine are now worried about the potential impact of the floor, which has risen 49% since 1999, next to average wage rises of 32%. The recent increase marked a 6% jump, compared with the still-quite-respectable 4.4% growth in average wages. So the question is obvious: Should we be worried?
Now economists are constantly being criticized on the minimum wage, largely because the public assumes our answer rather than simply asking for it. (Their assumption is almost always wrong, but such is the world of conventional wisdom.) The truth is that research in recent years has produced little evidence to support the traditional Classicalist view that minimum wages will make much more severe the jobless rate for low-skill workers. Will it have an impact? Probably. But not a great one, because, after all, somebody's got to flip the burgers and run the cash registers, or McDonald's goes bust.
That is not to say that we should raise it to £25/hr, as this would, I'll guarantee, be disastrous. But the "centrist view," as Paul Krugman has called it, seems to be that, while perhaps, cet par, having a slightly negative impact, typical increases in the minimum wage will be swamped by other factors, good or bad. The American floor was raised under Clinton, and, despite Republicans attempts to stoke fears of rapidly rising unemployment among workers lacking skills, the economy continued to scream. The same has been true of Britain.
Britain's £5.35 floor stands is sharp contrast to America's $5.15 federal floor. (As always, America, being a collection of states, should not be judged solely on federal policies. States also set their own minimums. Washington -- the state, not DC -- requires, if I'm not mistaken, a wage in excess of $9.00.) Think about this with the exchange rates in mind. The sterling-dollar ratio currently sits at roughly £.53 per greenback -- that is, a pound is worth a lot more than a dollar at the market rates, although Miguel and I would, of course, be happy to point out that it doesn't work out this way when you actually go to buy something, because Britain is about as strong with microeconomics as it is with bureaucracy. Britons actually get a shitty deal on prices compared with Americans, but that's another issue. (According to The Economist's Intelligence Unit, adjustment for purchasing power parity shaves about $4,500 from the average Briton's annual income compared with the market exchange rates.) It's still true that pounds are worth quite a bit more than dollars when you (say) hit the grocery store.
Anyway, my answer to the question I posed above the fold is quite simple and, I'm sure, predictable: No. Britain's growth, unlike that of the US, is accelerating from last year's anemic 1.75% to perhaps 2.8% or even 3% this year. The Low Pay Commission suggests that the era of rapid increases is probably over, and this may well be a good thing, since it should give the government time to gauge the impact. But, on the whole, October 1st's increase should not be seen as a threat to the fifteen-year-long expansion the UK continues to enjoy. If anything, Labour chose the timing of it's rapid rises perfectly, corresponding with some of the strongest years in the cycle, in which business was most able to absorb the change. The doomsayers were wrong. At least here in Notts, Britons earning the minimum can actually pay the rent and keep the lights turned on.
Congress would be wise to look across the Atlantic this January.