Gaining consensus for the Minimum Wage

Professor Richard Dickens explains how his research provided essential evidence that won over the National Minimum Wage sceptics.

When the National Minimum Wage was introduced in the UK by the then Labour government in April 1999, it received a cold and suspicious reception from many. The Financial Times reported great confusion among businesses about how it should be applied, with many threatening to defy the new legislation. There were also warnings that it may cause significant inflation.

Even unions were unhappy, with Unison warning the level it was set at (£3.60 an hour for all adults and a minimum £3 per hour for workers under the age of 22) would “perpetuate poverty”.

Richard Dickens, Professor of Economics at the University of Sussex Business School, whose research informed the development of the National Minimum Wage and the introduction of the National Living Wage recalls, the concept had taken a severe battering during the free marketing 80s and had few supporters.

“The view that comes from the competitive theory of the labour market is that, if you push the price of labour above market wage, then it becomes unprofitable for firms to continue to employ workers,” he says.  “It predicts that firms would just lay workers off if you force them to pay workers more than they are worth.”

But minds were slowly being changed. Evidence began to emerge from the UK and the US that a minimum wage did not necessarily, as the existing economic models suggested, destroy jobs.

“Policymakers and politicians understand that the minimum wage is popular with voters, and people generally think it is a good thing,” says Dickens. “The Labour party launched the National Minimum Wage in 1999 – the UK’s first nationally-set wage floor. The rate was introduced at a cautious level to begin with, but was then pushed up at a faster pace as evidence emerged that it raised the pay of low-wage workers without harming their job prospects. 

“There is much more acceptance of it now as a mainstream policy, not just in the UK but across the world. In the US, many cities and states have broken with the federal minimum rate and President Joe Biden is now pushing for a $15 an hour minimum wage.  You can see a real sea change in attitudes.”

Since its introduction, the rate has risen in the UK. When introduced, it was set at around 45% of average pay. Through most of the 2000s the rate rose faster than average wages, and by the early 2010s it was over 50% of median pay.

Paving the way for the National Living Wage

In 2014 Dickens was appointed as a Low Pay Commissioner. As a long-standing expert on the impact of the minimum wage – whose research had helped shape previous Low Pay Commission (LPC) recommendations – he was a natural choice for the panel, which advises the Government on the levels of minimum wage.

Based in part on Dickens’ body of research – and despite some remaining resistance to the policy – the Commission recommended to the Government that the UK enter a new phase of progressive real increases in the value of the minimum wage.

This paved the way for the then Chancellor George Osborne to introduce the National Living Wage in 2016, at £7.20 per hour for workers aged 25 and above. It was a fifty pence increase on the previous rate -  the largest ever increase - and raised the earnings of around two million workers.   

“The benefits, or the rationale, for introducing a minimum wage are two-fold,” says Dickens. “Firstly, minimum wages raise income in the household and reduce poverty, although the links with the latter aren’t as strong – if you have a well-structured welfare system it often means the benefit system will adjust to changes in income, so that workers don’t take home the full amount of any increase.

“There’s also a fairness and equity argument: that we should prevent people from being paid below a certain level. Prior to the minimum wage, people were paid very low hourly rates. That has been eradicated. In many people’s minds, it is just not right to pay people £2.70 per hour.”

The most successful policy in 30 years

More than 20 years on, the initial experiment of the National Minimum Wage and its evolution into the National Living Wage has been recognised by most as a huge step forward. It has helped wages for the lowest-paid workers grow at a faster rate than most of their counterparts, breaking the trend through most of the 80s and 90s, and produced very few negative effects on jobs.

The National Minimum Wage was voted the most successful policy of the past 30 years in a 2010 survey of Political Studies Association members. Much of that success can be attributed to the way that the LPC has carefully guided and advised on the policy. The commission was said to be “the most successful tripartite body established in the last three to four decades”, according to former Trade and Industry Minister Ian McCartney.

“I think one of the strengths of the Low Pay Commission is how it is structured,” says Dickens. “It is a social partnership with nine commissioners – you have equal representation for employers and employees with representatives from the CBI and TUC, you have small business representation and two independents. When a body like that can agree, then that makes it very difficult for the government to say ‘we don’t agree’.

“The final decisions from the LPC can be quite hard fought, and that is what gives credibility to the recommendations. They are the result of long negotiations between the sides, alongside careful consideration of the evidence.

“This year has probably been one of the toughest because of Covid-19. On one side you have to consider the impact of the pandemic on small business, where huge swathes of small firms are on their knees and face going bust in the next few months. But on the other side you have many frontline key workers in, for example, retail and social care, who have been instrumental in the response to the pandemic and for whom no pay rise would be a significant kick in the teeth. So it is about finding a balance between those two positions.”

As the success of the policy in the UK has grown, so its uptake around the world has accelerated. By 2015, the International Labour Organisation was reporting that more than 90% of its member states had a minimum wage.

Dickens says: “We see more and more countries adopting a minimum wage. There can be variations in how it is implemented, but the overall positive impact seems to be the same regardless. Australia has one of the most complex arrangements. There are hundreds of different rates depending on employee age and sector. One of things the LPC recommended when introducing it to the UK was to keep it simple to one national rate. Some had been arguing that there should be different rates for different regions, which does happen in other countries.”

Economists and sceptics reverse their views

Dickens himself has played a role in providing the evidence to convince South Africa to take up a minimum wage policy. He was invited as a member of the LPC to South Africa to speak at a government conference designed to bring stakeholders together and allay fears within the business community about the potential impact of introducing the minimum wage.

“The major difference with the UK is that South Africa has a relatively large informal economy that doesn’t have formal work contracts and so tends to be out of the scope of minimum wage policy,” he says. “But there is some evidence that the minimum wage becomes the going rate even in the informal economy. Up to six million workers will be covered by the introduction of a minimum wage in South Africa.”

As well as changing minds among politicians and policymakers around the world, the extensive evidence that supports the benefits of the minimum wage policy has forced many economists to reassess their own position on the policy. In the early 1990s there was almost near universal agreement in academia in opposition to minimum wage, with around 80% of academic economists agreeing that increasing the minimum wage would result in higher unemployment. This view has changed significantly as more evidence is produced. 

As a result of Dickens’ work on the LPC, there have been some significant changes to the policy in the UK, including substantial increases in the National Minimum Wage and the introduction of the National Living Wage, which aimed to reach 60% of median earnings by 2020. The age of eligibility is also due to fall to 23 years in April 2021 and then lower further to 21 years in 2024, by which time the rate is expected to reach two thirds of median pay. But there are questions about where minimum wage policy goes from here.

Dickens says: “You would think we were probably getting to the limit of how high it could go as a proportion of median pay but the evidence is not suggesting that. Obviously the pandemic has had a massive effect on minimum wage employees working in sectors such as hospitality, where there has been – and may well be further – job losses. The lesson of the last few years is that the increases have done a good job of raising pay without being too cautious and without harming employment prospects.”

While changing the minds of sceptical politicians and policymakers as well as fellow economists is no mean achievement, Dickens points to the impact his work has had on people on the UK breadline.

“One of the things we do as commission members is visit employers and employees in different work places up and down the country, and it is quite sobering the stories you hear of people struggling on low wages. This really brings to life the reality of what this policy means to people.”

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