Coronavirus and the National Living Wage Could Be a Deadly Combination for Low‐​Paid Jobs

This article appeared on UK Telegraph on April 23, 2020.
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The employment consequences of Covid‐​19 and subsequent lockdowns have been dramatic. The US has seen 26 million unemployment benefit applications in just five weeks.

A British Chambers of Commerce survey suggests seven in 10 UK firms have furloughed workers and 30pc have sent home over three quarters of staff. An extra 1.5 million Universal Credit claims since March 16 is further evidence of the consequences of lockdowns and social distancing.

It’s the Government’s policy to mitigate this by subsidising furloughed workers’ wages, keeping firms alive. The hope is to provide a bridge to maintain jobs into the post‐​lockdown world. But a V‐​shaped rebound in employment seems unlikely, even after lockdowns are lifted, in part due to government policy.

In particular, past national living wage rises. Covid‐​19 is having a harrowing impact on many low‐​pay sectors, including non‐​food retail, tourism, restaurants, bars and entertainment.

High minimum wages will prove much more difficult to cope with as these businesses toil with reduced revenues, higher costs and ongoing uncertainty.

Incredibly, while the Government was trying to lower retailers’ costs to keep them in business, it also went ahead in April with a 6pc real terms increase in the national living wage (NLW), to £8.72 per hour. This raised underlying wage bills just as businesses faced forced closures and demand downturns, the duration and longer‐​term effects of which are unclear.

This hike followed other large increases since this NLW was introduced in 2015. Prior to that the Low Pay Commission (LPC) advised on the minimum wage level, keeping a keen eye on preventing job losses and ensuring firms could afford it.

But George Osborne’s NLW overhaul replaced this framework with an arbitrary target: for the NLW to reach 60pc of median earnings by this year. That aim, for the first time, was completely divorced from companies’ ability to pay. Now we will feel the consequences.

Minimum wages fixed above market rates reduce demand for lower‐​paid workers. But while we had the highest employment on record and 795,000 vacancies, those consequences were likely delayed or hidden. In “good times,” businesses are expanding to meet new demand and competing to retain labour with market wages rising. They often find other ways to adjust to NLW hikes than immediate layoffs, such as raising prices, asking for more from their workers, or trimming future hiring.

In a sharp downturn, this dynamic changes. A sharp cycle of firm deaths and births will likely follow when subsidies are removed and the economy adjusts to new demand and supply patterns.

New businesses will be much more conscious of payroll costs and consider adoption of labour‐​saving technologies. When the US minimum wage was raised during the last recession, economists Jeffrey Clemens and Michael Wither found that states where the federal minimum increase resulted in higher mandated wages saw “significant, negative effects on the employment and income growth of targeted workers”.

Until an effective vaccine has been rolled out, evidence from surveys suggests consumers will visit cinemas, shopping centres, or large social events, less often. Consumer‐​facing businesses might also be compelled to adopt safety protocols, including personal protective equipment, regular disinfecting, or spacing tables, patrons, or workers to ensure social distancing.

All these reduce revenue potential or raise costs, making dealing with higher mandated wages more difficult and layoffs or cuts to hours more likely.

The LPC estimates two million workers were paid at or below minimum wage rates last year. Almost a fifth of those are in the hospitality sector, an industry almost completely shuttered today.

The House of Commons Library estimates 35pc of hairdressers are paid NLW or less, as are 19pc of retail staff, 16pc of childcare workers and 13pc of leisure workers. That’s 564,000 NLW workers in industries where minimum wage rates will likely bite much deeper because of Covid‐​19 disruptions.

National living wage advocates usually claim companies can find other ways to bear these costs than layoffs. Low Pay Commission surveys do suggest some businesses take the hit to profits.

Hotels, leisure businesses and caterers often push the costs on to customers through higher prices. Companies in wholesale, retail and hospitality have “improved productivity” by sweating workers harder or reducing their job flexibility.

Yet with profits crushed, price‐​sensitive consumers and existing workers likely to demand holidays or more flexibility after lockdowns, these alternatives to layoffs seem unlikely.

After the last recession, Gordon Brown and then George Osborne understood the need to limit minimum wage increases. They allowed inflation to reduce its real value between 2008 and 2013, as it remained stable relative to median earnings.

This time, our minimum wage level is higher and, as a result of the crude target, still aggressively increasing when earnings are likely to stumble. Prior to the April increase, even the Resolution Foundation, usually the policy’s biggest cheerleader, suggested a delay given economic conditions.

An unwillingness to block promised NLW rises even in recessions was a problem foreseen by opponents when George Osborne first politicised it. The optics of denying many supermarket and social care workers a well‐​earned pay rise at this time meant the Government was always going to persist. But policies that look benign in a strong economy can scar it when circumstances change.

In the post‐​lockdown period, the national living wage could prove fatal to thousands of jobs in industries already rocked by Covid‐​19.

Ryan Bourne

Ryan Bourne holds the R Evan Scharf chair for the public understanding of economics at the Cato Institute.