- Minimum wage increases in Britain have delivered pay increases of 10% to retail workers in the last 18 months, since the “National Living Wage” policy was implemented.
- The increases have “had a minimal impact to date on most big retailers’ profits,” according to a note from Morgan Stanley.
- The cost of labour at retail chains rose only 0.3% on average.
- The data stands in contrast to a long-held myth among economists, that raising the minimum wage is bad for job creation.
- In the UK, it has been good for poorer workers, and inflicts relatively little pain on their employers.
The UK’s minimum wage – or “national living wage,” to use its official name – is set to rise to about £9 per hour by 2020. That is going to be good news for workers in the worst-paid jobs, currently earning £7.20 an hour. It will give them a 25% pay raise.
And, perhaps counterintuitively, it probably won’t hurt the employers who pay them either, according to data from Morgan Stanley and the Office for National Statistics.
“The introduction of the National Living Wage has had a minimal impact to date on most big retailers’ profits,” according to analysts Amy Curry and Geoff Ruddell, even though the rising minimum wage requirement “has driven up hourly pay rates in the retail industry by [about] 10%.”
Conservative economists have long argued that raising minimum wages is bad for workers because it makes the price of creating jobs more expensive, and thus creates fewer jobs overall. If you want the most people in the most amount of jobs, then let supply and demand of workers set the price of labour, they argue.Milton Friedman was the foremost proponent of this argument.
In fact, Britain has already been doing a decades-long national economic experiment, by raising its minimum wage steadily from £3.60 in 1999 (a doubling so far). Before that, the UK had no legally required minimum wage – a legacy of the Thatcher years.
Britain has been doing a massive national experiment on minimum wage rates
So far, the results have been largely good for low-paid workers and largely bad for conservative economists: Wages have gone up and unemployment has gone down. There has been no observable negative effect on job creation in the UK since 2000, according to data supplied by the Office for National Statistics.
The Annual Survey of Hours and Earnings, covering the year through April 2017 (and published in October 2017) showed that pay for the poorest workers rose 3.2% in the most recent period, while inflation was at 2.6% – thus delivering a real wage increase to the lowest-paid employees. Pantheon Macroeconomics analyst Samuel Tombs created this chart from the data, showing that pay gains were strongest for the poorest workers in the population:
Low-paid workers saw solid pay gains, while the overall cost of labour rose only 0.3%
Morgan Stanley published a research note in November that contained further good news for the low-paid. Those on minimum wage have seen solid gains, typically of 7-10%, in the legally required increase from £6.50 to £7.20. At the same time, the average overall cost of labour for retail chains increased only 0.3%.
Retail sales increased faster than labour costs
That suggests that the “pain” of increasing wages for the lowest paid isn’t that great. Labour costs as a percentage of sales at selected large retailers rose from 14.9% to 16.3% since 2012 – a marginal rate of increase of just over 1 percentage point.
UK retail sales in 2017 increased by just under 4%, the analysts say. The rate of increase of wages as a per cent of sales from 2016 to 2017 was just under 2%, on Morgan Stanley’s numbers. That suggests total sales are generally increasing faster than total wage bills.
Morgan Stanley estimates that labour is typically 51% of operating costs at chains like Tesco and Sainsburys, so increases in those costs are watched carefully by employers.
But some workers’ perks have been reduced
It isn’t all good news of course.
Those pay gains have not come for free. Morgan Stanley points out that many employers have reduced other types of compensation as their wage bills have risen. Typically, they have reduced extra pay for unsociable hours, night work, Sundays and holidays. Double-time is a thing of the past. “Starter rates” for new employees are gone. Free lunches and paid breaks are disappearing. And, like many companies, retailers have ended their defined benefit pension plans.
So clearly, some workers have lost valuable perks and privileges to pay for the progress of their less senior colleagues. And, Morgan Stanley says, retailers are running out of one-off perk cuts to pay for further minimum wage increases. They suggest that future wage increases are going to come out of company profits, or from increased prices.
But in terms of the larger debate about the overall effect of stepping-up wage rates by law, the data comes down largely on one side: Raising the minimum wage is good for poorer workers, and inflicts relatively little pain on their employers.
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