LONDON (Reuters Breakingviews) — Britain's labour market is working in slightly mysterious ways. Falling unemployment has boosted wages more slowly than expected, and productivity has not yet picked up along with GDP growth. The government's planned minimum wage increase could become another puzzle.
Chancellor George Osborne has proposed a National Living Wage for those aged 25 and over. By 2020, the minimum will be 60 per cent of median earnings for this age group. The current minimum hourly rate of 6.50 pounds ($13.13 CAD), applicable to everyone aged 21 or over, is about half the median.
In theory, higher pay at the bottom of the income scale leads to lower government tax credits. The Office for Budget Responsibility, Britain's independent budget watchdog, reckons the shift from public to private payments will not add much to the inflation rate or subtract much from GDP growth. The icing on the cake, says Bank of England Governor Mark Carney, is that more expensive labour could spur companies to invest more to increase productivity.
But this may be somewhat Panglossian. Of the 26 OECD countries which have some form of statutory minimum wage, only Turkey, Chile, France and Slovenia have a floor which is 60 per cent or more of median earnings. Even with the exemption for under-25s, Britain's will move from the middle towards the top of the range of OECD economies.
The high minimum wage floor will only work if employers are willing to pay it. In the UK, they may not, because too many low earners also have low skills. By the OECD's measure of proficiency in literacy, numeracy and problem solving, 40 per cent of the workforce is classified as low-skilled, a higher proportion than in 15 other developed and emerging economies.
Of the six countries with a bigger share of low-skilled workers than Britain, all bar France have a minimum wage which is half or less of national median earnings. And France has a chronic problem with inadequate job creation.
British employers might well decide to relocate jobs overseas or dodge the new minimum wage by hiring younger people, who aren't eligible for it. This might reduce youth unemployment, while putting many low-skilled older workers on the dole.
Ideally, British workers should become more qualified. But this requires something Osborne wants desperately to avoid: more government spending.