Minimum wage has passed the high inflation test

As policy ideas go, the minimum wage has had a great run of it. Productivity might have been disappointing after the financial crisis, average pay growth might have been weak, but the minimum wage was one policy tool that seemed to help people at the bottom of the ladder.

When Germany introduced a minimum wage in 2015, it reduced wage inequality without hurting people’s employment prospects.

When the UK’s Conservative government supercharged the minimum wage for over-25s in 2016, it didn’t do much for productivity but it did reduce low pay while employment levels continued to rise. Other countries and regions took the same approach, from South Korea to a swath of US states.

Then the pandemic and the war in Ukraine turned the macroeconomy upside down. So how has the minimum wage fared through this bout of high inflation – did it run into trouble?

‘My parents always encouraged us to work hard but to also enjoy life’

---

McGrath may be missing the point on ETF tax changes

---

Nadia Calvino: Ireland is a success story of what EU membership can bring

---

Rents likely to rise as supply of new units slows down subscribers – Daft.ie report

---

It could have gone wrong in a couple of ways. On the one hand, the various mechanisms that exist in different countries for uprating the wage floor might have proved too slow or too cautious to keep up with the surge in prices.

That could have led to a sharp fall in real-terms pay for workers at the bottom – a bad outcome for people who are especially vulnerable to the price shock as they spend a bigger chunk of their incomes on energy and food.

None of this is to say that wage floors aren’t necessary. Job markets aren’t always hot, after all.

On the other hand, there was also a risk of the opposite problem: that minimum wages could rise quickly, particularly in countries where they are indexed to inflation rates, and fuel a self-reinforcing loop of higher pay and higher prices.

The good news is that neither of these things appear to have happened, according to research by economists at the Organisation for Economic Co-operation and Development (OECD).

Most OECD countries have held their nerve and increased their minimum wages to try to keep up with inflation (the US is an exception: at the federal level, its $7.25 (€6.65) an hour minimum wage hasn’t increased since 2009).

On average across OECD countries, nominal statutory minimum wages increased by 29 per cent between December 2020 and May 2023, while prices increased by about 25 per cent. In other words, minimum wages proved “a useful policy instrument to protect the most vulnerable workers from rising prices”, the researchers concluded.

Nor did they find much reason to worry about wage-price spirals. Their calculations suggest that a 1 per cent increase in the minimum wage only adds up to 0.09 per cent in the US and 0.23 per cent in France to aggregate wage growth.

Will ending the 9% VAT rate spell disaster for the hospitality sector?

Listen | 37:57

Minimum wages seem to have passed the test of high inflation, then. But it’s worth noting that employers have been so hungry for staff that the dynamics of supply and demand have pushed up wages for people in lower-paid jobs anyway.

Take the UK. For most of this century, the number of minimum wage jobs has been growing, from less than half a million in 2000 to well over 1.5 million by 2019. As the pay floor has risen, more people have found themselves bunched up on it.

But between 2019 and 2022, the number of minimum wage jobs fell unexpectedly by about 400,000 – the first time that has happened in 20 years.

Why? Analysis by the UK Low Pay Commission suggests wage growth has been faster for people paid slightly above the minimum wage.

In particular, between 2019 and 2022 (when the minimum wage rose to £9.50 an hour), the number of jobs that paid exactly £10 an hour more than doubled from 190,000 to 420,000.

Employers in low-paying sectors told the LPC there had been so much competition for scarce workers, they just had to pay up.

For all the good a minimum wage can do for workers – nothing beats simply being in demand.

The Association of Convenience stores, for example, reported that its members “‘tend to employ store colleagues at or just above” the minimum wage but it had proved “increasingly difficult to recruit staff at this level”.

When I read the UK data, I was reminded of a conversation I had last year with a warehouse worker in the US, who argued that the “whole decade-long battle over raising the minimum wage to $15 an hour” had been superseded.

“The free market already decided,” he said. “Now no one takes a job for under $15 an hour.” And employers desperate for staff haven’t just raised pay – an OECD analysis of online job adverts shows there has also been an increase in the number of US employers promising health insurance and paid time off.

None of this is to say that wage floors aren’t necessary. Job markets aren’t always hot, after all. But it is a reminder that – for all the good a minimum wage can do for workers – nothing beats simply being in demand. – Copyright The Financial Times Limited 2023