City warns minimum wage could destroy 250,000 jobs

A leading City commentator has predicted that the Labour Party's plans to introduce a national minimum wage could lead to the loss of more than 250,000 jobs.

The catering trades, textiles and retailing would be most seriously affected, says Bill Martin, chief economist at investment bank UBS, in one of the first detailed City studies.

The prediction from Mr Martin, who is also an adviser to MPs on the Treasury Select Committee, follows research from other quarters highlighting the price that could be paid in jobs for setting a minimum wage.

Mr Martin estimates that even a level as a low as pounds 3.60 an hour would destroy 100,000 jobs. ''Labour would be well advised to reject the unions' demands for minimum pay,'' he writes in his study of the economic impact of the party's policies.

Some unions have called for a higher minimum of around pounds 4.20 an hour, equal to half of median full-time male earnings. That would cost 185,000 jobs and reduce the level of gross domestic product by 1 per cent, according to the UBS calculations.

So far, however, Tony Blair has rejected demands for a specific figure before the election, saying it will be set later, after consultation with both unions and employers.

Although recent academic studies have suggested that in some industries a minimum wage can actually boost employment, Mr Martin argues that the conditions for this are rare.

It depends on workers being tied to and exploited by a single employer because of barriers such as the difficulty of travelling to work anywhere else.

In competitive industries, however, an effective minimum can be expected to reduce the number of jobs, both directly and by increasing pay all the way up the scale as other employees try to restore their pay differentials.

If a quarter of the earlier differential between the lowest-paid and higher-paid workers is restored, then a pounds 3.80 minimum would add just over 2 per cent to the economy's pay bill as a whole, according to UBS. But it would add 8.8 per cent to labour costs in the textiles industry and 12.6 per cent in catering.

At pounds 3.80, with 25 per cent of the differential restored, total job losses might be 183,000; with 50 per cent restored, losses might hit 250,000, UBS estimates.

The pounds 3.80 level is lower than many unions would like: about a third of part-timers are currently paid less, but only 7.5 per cent of full-timers.

The UBS estimates confirm the preliminary results of a study by the Employment Policy Institute, an independent research body. Interviews with employers suggested that jobs in hotels, textiles, industrial cleaning, hairdressing and healthcare would be seriously affected by a minimum wage set as low as pounds 3.50 an hour.

In other industries, however, firms suggested they would pass on the cost to their customers.

The EPI warned that the policy would also trigger significant restructuring, and that smaller firms, which typically pay less, would face the risk of going out of business. Less surprisingly, the Confederation of British Industry and Institute of Directors have also warned of the jobs cost of Labour's policy. The IoD tomorrow publishes a new survey showing members' hostility to a minimum wage.

Hamish McRae, page 6