Alexander Bowen: The minimum wage would make more sense if it wasn’t the same across the country

Alexander Bowen is a trainee economist based in Belgium, specialising in public policy assessment, and a policy fellow at a British think tank.

 A national minimum wage is killing the North.

It might sound slightly hyperbolic but it’s true enough.

What this article is not, is an argument against the concept of a minimum wage generally or in the UK’s specific case. Articles about Sweden and Denmark not having a minimum wage, something that alongside being functionally wrong, have been done to death. So too has the trite journalistic insistence that disemployment is basic supply and demand – we have more than enough evidence that this isn’t the case, though it may be approaching the hinge point where it may be.

On Friday, the FT’s John Burn-Murdoch dropped a data deep dive on the death of the UK’s graduate premium – that with the graduate share of the workforce going from 20 to 40 per cent the graduate premium has been almost arithmetically slashed from 80 to 40 per cent. Importantly something that has not happened anywhere else – the Netherlands or the US, with HE expansions larger than our own, have seen their graduate premia rise 30 and 15 percentage points respectively – something Murdoch in part attributes to the minimum wage.

It’s something that the regional data clearly bares out too. In Northern Ireland the minimum wage is now 77 per cent of the median wage, in Wales 76 per cent, and in Yorkshire 75 per cent. In London, the only region where the graduate premium has not collapsed, it sits at just 52 per cent.

The national minimum wage has genuinely collapsed the premium for graduates in all but one place – and what actually is basic supply and demand is that if there is only one place where your labour is valued, then you will, if you can, move there. In having a national minimum wage, we have adopted a system then where graduates are incentivised to chase their premium, and leave their home regions, whilst near minimum wage workers, buoyed by commanding near-median wage and enjoying vastly lower living costs, are oversupplied in the regions that need them least.

In competition economics there’s a fairly simple test that is used to assess what constitutes a market – SSNIP, a Small but Significant Non-transitory Increase in Prices. Put simply it asks whether an imaginary monopoly selling a given product could raise prices by 5 or 10 per cent or whether customers would substitute away from it and to an entirely different product instead – if the answer is yes then the original company is not a monopoly. For a demonstration, imagine a scenario where one company sold all of the Chinese food in England and they raised prices by 10 per cent, so long as customers substituted their Chinese with an Indian then Chinese and Indian food would be one market with no monopoly.

Where we have gone so wrong with the minimum wage is in defining the labour market not based on a rational test, like substitution, but on a simple feeling that it ought to be national and it ought to be uniform. We know that this is not the case particularly at the bottom end.

Whilst a childless 30-something working in elite professional services might be able to freely pick between Leeds, London, Manchester or anywhere else, the realities of near minimum wage work and the social condition of the people doing that work, is that the fixed cost of relocation, economic and social, exceeds any gain from marginally higher pay. Nobody is relocating across the country to chase 50p more an hour. So long as that’s the case then we don’t have a national minimum wage labour market so we ought not have a nationally set minimum wage.

We have much too little evidence on what specifically this is doing in the UK, but what similar national pay systems are doing in other countries with stark regional inequalities is well documented.

Until 2015, neither Germany nor Italy had a minimum wage relying instead on national sectoral bargaining where unions negotiate conditions that apply to every worker in the industry everywhere. There was one core difference though – the Germans who acquired their unequal region, East Germany, realised that the system could not stand.

They broke down their national pay bargaining system creating opening and hardship clauses letting specific firms in specific areas negotiate different pay conditions. Keeping East Germans in work meant being honest and acknowledging that their productivity was lower. Coupled with midi and mini jobs, beneficial arrangements for marginally productive workers who would otherwise have no job, the Germans were able to keep people in work.

The Italians who, lacking the sudden absorption aspect of Germany’s reunification, have been unable to allow for any deviation from national wage setting and have paid the consequences. In the productive North workers are paid the same as in the South, yet face vastly higher living costs meaning the most productive workers are rewarded with the lowest purchasing power and businesses are left severely understaffed. In the South the inversive is true too – with wages outstripping their productivity businesses have no incentive to create jobs.

You are left then, thanks to the nationalised nature of the system, with an understaffed and underpaid North and an overpaid and unemployed South. It has huge consequences too – one NBER paper estimates the cost of having a nationally set policy as being 2.5 million jobs worth 14 percentage points less employment in the South and 100€ a month in aggregate earnings.

Now we might not have the same sectoral pay bargaining system as Italy, but given our regional inequalities are nearly as vast, the extent to which the minimum wage now more or less matches graduate salaries, and our exponentially greater issue with housing costs in our most productive regions, it seems hard to say we are not now seeing similar issues.

The national pay scales (with their pitiful ‘London adjustments’) used in the public sector are even likelier to run up against the same Italian issue. A fun test I always like to run is to look at jobs in the Treasury at the Darlington Campus and in Whitehall then look at the price of a pint at the pub closest to the office; add in the closeness of the wage and the progressivity of the tax system and you are left with a worker doing the exact same thing in Darlington buying 11,000 pints for the 6,500 or so that the Whitehall worker can buy. A real pay disparity that anyone can see is plainly unsustainable.

So, without sounding like someone who might sit in Labour’s House of Peoples and Nations and Regions and Communities, or whatever banal name they will devise should they ever do what they said they would to the House of Lords, fixing the minimum wage means looking again at devolution. It means advocating for something Conservatives have been unwilling to do so far and it means giving Wales, Scotland and Northern Ireland new powers – or at least this one, granting them the right to set their own minimum wage.

Yes, the SNP might do what it has often done, not least during Covid, of making its policy half-a-percent different to England for the sake of simple showboating, but if they want to embrace disemployment then on their record let it stand.

That kind of devolution has a useful function too – allowing us to measure the direct consequences of policies without needing to try them nationally or create some pseudo-doppelgänger Britain. The Scots for instance are currently demonstrating the upper limits of income tax, raising rates above England and reducing their own revenues, whilst Wales (despite the insistence of the beloved Education Secretary) has served as a 15-year natural experiment of the difference Labour makes to pupil’s learning (a substantially negative one).

As for England’s regions, given the current devolved settlement, it means broadening the Low Pay Commission’s mandate so that it can set a different minimum wage in each region it identifies. If it believes, and can prove, that Surrey’s minimum wage workers constitute one labour market and are not an extension of London then let it set a Surrey-specific minimum wage and if it believes the opposite then let it set that.

A minimum wage can work perfectly well in markets – but for it to work we need to actually use markets.