Who's afraid of the minimum wage?

Low pay is bad for employers as well as workers. Nick Cohen says the left should make more noise

LAST week, the TUC held an important debate: it was on the need for a minimum wage to help the estimated 3 million British workers who earn less than £3.50 an hour. You will have heard little about this because the debate was held behind closed doors, and only a brief press notice ensued.

So little attention is taken of the TUC these days that one wonders why it bothered: the brothers and sisters could have broadcast their proceedings by Tannoy and no-one would have listened. But the caution was significant. It shows the timidity of the left at the very moment when you would expect its ideas to be rampant.

According to participants, the meeting went something like this: Bill Morris of the Transport and General Workers and Alan Jinkinson of Unison, the public sector union, said that this was the week of all weeks to campaign for a minimum wage and reaffirm that the TUC wanted a resolute commitment that a Labour government would set it at half of average male earnings (about £4 an hour).

They would seem to have a point. Public revulsion at the "executive troughing" of private monopoly managers has reached new levels with the revelation that David Jeffries, the National Grid chairman, had got himself a pay deal worth £2m. Meanwhile a 28-year-old on £200,000 a year (plus bonuses), who appeared to be regarded by his blue-blooded employers at Barings as a financial genius, had just managed to break a bank.

Surely, with even John Major finding it politic to condemn executive greed, now was the moment to raise cases - collected by the Low Pay Unit - of shop workers being offered £1.66 an hour and hairdressers £1.43 in advertisements in government job centres. But Morris and his supporters were met with the sound of embarrassed mutterings and the shuffling of papers. Too dangerous and too risky was the general conclusion. Any strong statement could embarrass the Labour leadership which does not want to tie the party to a specific minimum wage formula before the next election. All the TUC would agree was to hold a conference on minimum wages in July and campaign on the issue at some unspecified date in the future.

The lack of urgency is all the more surprising because it is not simply the events of the past week that appear to offer the Labour movement an opportunity. For the past four years economists in Britain and America have been studying low pay and have come to the conclusion (surprising to those brought up under Conservative economic orthodoxy) that a statutory minimum wage does not cost jobs and may even increase employment.

According to free-market theory, the economists' findings cannot be right. If the state intervenes to protect the lowest-paid industrial and service industry workers, as it did in Britain until the Government abolished wages councils in 1993, then it will "price workers out of jobs". This line of reasoning reached its pinnacle (if that is the right word) before the last election when Michael Howard argued that Labour's plans for a minimum wage would cost 2 million jobs.

But the world of free-market theory and the world of work are different places. In 1990, the US government raised the national minimum wage to $4.25 (£2.70) and economists from Harvard and Princeton went to find out what the real consequences were. Study after study found that the income of some of the poorest people in America had been raised without jobs being lost.

The most remarkable finding came from the east coast state of New Jersey. Local politicians raised its minimum wage to $5.05 while the neighbouring state of Pennsylvania kept its rate at the $4.25 national minimum. Economists looked at fast-food restaurants in both states and found that employment had fallen in cheap-rate Pennsylvania and risen in expensive New Jersey.

How could this be? One answer is that employers exaggerate the burden of a minimum wage; it is one that they can afford. The second answer, say the economists, is that employers who pay low wages are not behaving as rationally as they think they are. Poor pay tends to increase staff turnover and to make it more difficult to recruit. So firms may lose business because they are unable to meet orders. They also face higher training costs.

The British evidence points the same way. The Centre for Economic Performance at the London School of Economics (LSE) examined the history of the Agriculture Wages Board, which protects the pay of farm workers, and the operation of the wages councils, and found no evidence that jobs had been lost as a result of public intervention in the labour market.

Since the Government abolished wages councils, which set minimum rates for workers in the retail, hotel, hairdressing and other trades, the poor have had the dubious privilege of looking at free-market theory from a different angle. Hourly rates have gone down for many jobs which used to be protected by the wages councils, but the increase in vacancies, which the theory predicted, has not happened. On the contrary, a Low Pay Unit study last year found that employment in hotels fell after wages councils were abolished.

Further research from the LSE will tell a broadly similar story when it is published later this year. "We're not saying that if you set a minimum wage at £10 an hour then it won't have an adverse effect on employment," said Stephen Machin, one of the researchers. "But the evidence shows that there is a level at which a minimum wage can be imposed which will help some of the poorest people in the country and will not lead to job losses."

The Americans seem to agree. In Britain, the US is often seen as the most free-market economy in the West. But although the level of minimum wages causes political controversy, not even Newt Gingrich and the radical right-wing Republicans who have taken over Congress have proposed its abolition.

And there is a perfectly respectable conservative argument for them. Minimum wages encourage people to work instead of staying at home on benefit and promote responsibility rather than dependence. They also reduce the need for welfare payments to low-paid workers, thus cutting what is, in effect, a taxpayers' subsidy to employers. In Britain, the cost of Family Credit - a benefit available to low-paid workers with children - has doubled in the past two years and now stands at £1bn a year.

After Wednesday's meeting of the TUC, John Monks, the general secretary, said that he wanted to win "the intellectual high ground" when he finally holds the planned conference in July. The "high ground" is there to be taken if he and his colleagues have the will to fight for it.