London can afford a higher minimum wage
There is something funny going on at the bottom of the pay distribution. Fifteen years ago the pay of the bottom 10 per cent was over a quarter higher in London than the UK average, but by 2012 that differential has almost halved to around 13 per cent. Good for equality, you might say, but why has this happened?
Conventional economic theory explains that in the long run wages are linked to productivity – at least, in the absence of exploitation, they should be. So a possible explanation is that the low-paid workers outside London have had a surge in the efficiency of their work. While the country’s care assistants, hairdressers, cleaners, waitresses, teaching assistants, and check-out operatives work extremely hard, it is difficult to see that there is huge scope in these people-based jobs to experience that type of productivity improvement in one part of the country over another.
Moreover, during the same period, the overall increase in output per worker has risen far faster in London than elsewhere due to the relative concentration of financial and business services, which would suggest that, if anything, the average trend should be the opposite.
Perhaps the solution lies instead in London’s traditionally higher levels of unemployment? Are there simply more people available to work at lower wages in London, causing supply and demand to push wage rates down? This might be a valid argument if wages were lower in London in absolute terms, but they have continued to rise over the same period. Pay at the tenth percentile was £7.29 in April 2012 in London, up from £4.77 in April 1997; for the UK as a whole it was £6.46, up from £3.81.
The answer becomes clearer when we overlay what the minimum wage has been doing at the same time. What appears to have happened is the minimum wage, introduced nationally in 1999 at a rate of £3.60 an hour, has progressively lifted the pay of the lowest paid outside London. However, because the market rate for low-paid work was already higher in London it has not made much of a difference in the capital: in 2012, for example, the minimum wage covered four per cent of workers aged over 21 nationally but only two per cent in London.
This is a policy opportunity. It means that it is possible to raise the minimum wage in London without either job losses, or having to lower it elsewhere. London employers will respond in the same way that others have already done, which the evidence shows has not jeopardised jobs.
A London minimum wage of around £6.75 today would have the same impact on the capital’s low-pay sectors as the current minimum wage of £6.31 does nationally. Over time, the differential might rise much further, given what it looked like in 1997. One for the mayoral manifestos?
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Kitty Ussher is a contributing editor to Progress and a former exchequer secretary to the Treasury. She is author of London Rising: The Case for a London Minimum Wage
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Photo: Todd Stadler