Leading Article: Fear not the minimum wage

ONE OF the most enduring tenets of free-market economics is the belief that the imposition of a statutory minimum wage destroys jobs by pricing people out of work. The logic seems impeccable: if the government forces firms to pay employees more than the going rate, they will be neither willing nor able to employ as many of them.

This logic underpinned the Government's decision to scrap the Wages Councils, which took effect a year ago this week. Established by Winston Churchill in 1909, the Wages Councils set minimum pay levels for 2.5 million low-paid workers in shops, hotels, restaurants, hairdressing and clothing manufacture. A survey by the Low Pay Unit showed yesterday that pay in these industries has dropped significantly since abolition. But there is no sign yet that lower wages have priced more people into work in these industries.

This is not as surprising as it appears. One of the great flaws in free- market economics is the belief that people can be bought and sold in the same way as apples or electric kettles. They cannot.

Many companies pay their employees less than their work is worth to them in extra revenue and profits. In the looking-glass world of economic theory this should be impossible. Competing companies will offer higher wages and poach their workers. But in the real world most employees are loath to leave their places of work. Finding another job is often expensive and time-consuming.

So a statutory minimum wage slightly higher than the 'market' rate will not necessarily destroy jobs. It may simply mean that people are being paid what their work is worth. The net effect may even be a rise in employment, as higher wages attract applicants for whom it might otherwise not be worth entering the official labour market.

This explanation fits the facts of the 1980s, when employment suffered in industries covered by the Wages Councils as their judgements became less generous and were enforced less rigorously. But the level at which the minimum wage is set is crucial: too high and jobs will be destroyed, too low and it will simply be ineffective.

The Labour Party is committed to introducing a national minimum wage. The leadership is being pressed by some trade unions to announce now that it will be set at a level of pounds 4 an hour, but academic research suggests this is too high. The Liberal Democrats will present their conference this year with a choice of two schemes, both of which sensibly make it possible to vary the minimum wage by region, industry and age of worker.

Neither party should be frightened off by the Government's simplistic economic arguments. Combined with a tax and social security system that better promotes work incentives for people on low earnings, a flexible framework of minimum-wage legislation would help to make companies take a more appropriate share in maintaining the low paid, rather than thrusting the burden on an over-stretched state benefits system.