Undercover Economist

Highs and lows of the minimum wage

‘The lesson of all this is that the economy is complicated and textbook economic logic alone will get us only so far’

In 1970, Labour’s employment secretary Barbara Castle shepherded the Equal Pay Act through parliament, with the promise that women would be paid as much as men when doing equivalent jobs. The political spark for the Act came from a famous strike by women at Ford’s Dagenham plant, and the moral case is self-evident.

The economics, however, looked worrisome. The Financial Times wrote a series of editorials praising “the principle” of equality but nervous about the practicalities. In September 1969, for example, an FT editorial observed that “if the principle of equal pay were enforced too rigorously, employers might often prefer to employ men”; and the day after the Act came into force on December 29 1975, the paper noted a new era “which many women may come to regret”.

The economic logic for these concerns is straightforward. Whether because of prejudice or some real difference in productivity, employers were willing to pay more for men than for women. That inevitably meant that if a new law artificially raised women’s salaries, women would struggle to find work at those higher salaries.

The law certainly did raise women’s salaries. Looking at the simple headline measure of hourly wages, women’s pay has gradually risen over the decades as a percentage of men’s, although it remains lower. Typically, this process of catch-up has been gradual but, between 1970 and 1975, the years when the Equal Pay Act was being introduced, the gap narrowed sharply.

Did this legal push to women’s pay cause joblessness, as some feared? No. Women have steadily made up a larger and larger proportion of working people in the UK, and the Equal Pay Act seems to have no impact on that trend whatsoever. If any effect can be discerned, it is that the proportion of women in the workforce increased slightly faster as the Act was being introduced; perhaps they were attracted by the higher salaries?

The lesson of all this is that the economy is complicated and textbook economic logic alone will get us only so far. The economist Alan Manning recently gave a public lecture at the London School of Economics, where he drew parallels between the Equal Pay Act and the minimum wage, pointing out that in both cases theoretical concerns were later dispelled by events.

The UK minimum wage took effect 16 years ago this week, on April 1 1999. As with the Equal Pay Act, economically literate commentators feared trouble, and for much the same reason: the minimum wage would destroy jobs and harm those it was intended to help. We would face the tragic situation of employers who would only wish to hire at a low wage, workers who would rather have poorly paid work than no work at all, and the government outlawing the whole affair.

And yet, the minimum wage does not seem to have destroyed many jobs — or at least, not in a way that can be discerned by slicing up the aggregate data. (One exception: there is some evidence that in care homes, where large numbers of people are paid the minimum wage, employment has been dented.)

The general trend seems a puzzling suspension of the law of supply and demand. One explanation of the puzzle is that higher wages may attract more committed workers, with higher morale, better attendance and lower turnover. On this view, the minimum wage pushed employers into doing something they might have been wise to do anyway. To the extent that it imposed net costs on employers, they were small enough to make little difference to their appetite for hiring.

An alternative response is that the data are noisy and don’t tell us much, so we should stick to basic economic reasoning. But do we give the data a fair hearing?

A fascinating survey reported in the most recent World Development Report showed World Bank staff some numbers and asked for an interpretation. In some cases, the staff were told that the data referred to the effectiveness of a skin cream; in other cases, they were told that the data were about whether minimum wages reduced poverty.

The same numbers should lead to the same conclusions but the World Bank staff had much more trouble drawing the statistically correct inference when they had been told the data were about minimum wages. It can be hard to set aside our preconceptions.

The principle of the minimum wage, like the principle of equal pay for women, is no longer widely questioned. But the appropriate level of the minimum wage needs to be the subject of continued research. In the UK, the minimum wage is set with advice from the Low Pay Commission, and it has risen faster than both prices and average wages. A recently announced rise, due in October, is well above the rate of inflation. There must be a level that would be counterproductively high; the question is what that level is.

And we should remember that ideological biases affect both sides of the political divide. In response to Alan Manning’s lecture, Nicola Smith of the Trades Union Congress looked forward to more ambition from the Low Pay Commission in raising the minimum wage “in advance of the evidence”, or using “the evidence more creatively”. I think British politics already has more than enough creativity with the evidence.

Written for and first published at ft.com.