Proposal to increase the minimum wage

Katja Hall  the CBI's chief policy director
Katja Hall the CBI's chief policy director
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THE minimum wage should increase by more than the rate of inflation for the first time in more than five years, government advisers recommended, helping low earners regain a little of the ground they have lost to a rising cost of living.

The Low Pay Commission (LPC) has proposed a 3 per cent increase in minimum wage, which would be the first above-inflation increase since 2008, the Government said this week. The Government usually accepts the commission’s recommendations.

The rise would take effect in October – around six months before the next general election, in 2015. Living standards are likely to be a key issue as the economic recovery gains traction.

Inflation fell to 1.9 per cent in January, undershooting the Bank of England’s 2 per cent target for the first time since November 2009. But in the intervening four years, it averaged 3.3 per cent, eroding the value of incomes across the economy.

During that same period, the minimum wage rose an average of just 1.9 per cent a year.

A spokesman for Prime Minister David Cameron said the Government will want to take time to consider the LPC’s proposal.

“Three per cent would represent a real-terms increase, and I believe the LPC has signalled that this could be part of a process by which the value was restored to what it was before the great recession,” he said.

The increase would take the minimum wage for an adult worker to £6.50 an hour, up from £6.31 now.

Business contacts have told the Yorkshire Post that the rise could wipe out profit margins at smaller firms.

The announcement comes a few weeks before Chancellor George Osborne announces his annual budget on March 19. He said last month the minimum wage would need to rise to £7 by 2015 for workers aged over 21, to return its value to its level before the financial crisis.

As political parties start to position themselves for the May 2015 election, the Conservative-led coalition has come under attack from the Labour party, which says Britain is in the grip of a cost-of-living crisis.

The LPC’s proposal got a mixed reaction from trade unions. London-based business representatives gave a cautious welcome.

While the Trades Union Congress said it would be a welcome move, the Unite trade union said it was a “slap in the face” for struggling low-paid workers.

The Confederation of British Industry said the rise reflects improvements in the economy. Data earlier in the week showed business investment picking up as the economy grew 0.7 per cent in the last three months of 2013, unchanged from an earlier read- ing.

“The LPC has made a sensible judgement on the increase, and not recommended an unaffordable rise that would put jobs at risk,” said the CBI’s chief policy director, Katja Hall.

Economists said a 3 per cent minimum wage hike was unlikely to have a big effect on the economy.

“It’s not going to do much to close the shortfall in the reduction in the real minimum wage in the last few years,” said David Tinsley, an economist at BNP Paribas. “But the thing about the minimum wage is that it does set the benchmark.”

The LPC estimated that around 5.3 per cent of jobs were paid the minimum wage in 2012. Given the weakness of earnings in comparison with inflation over the last few years and the amount of spare capacity in the economy, Bank of England policymakers are unlikely to be overly worried by a minimum wage hike.

“If everyone got 3 per cent, that would be a firming of wage pressures. I find it hard to think what would scare the Bank into raising rates prematurely,” Mr Tinsley said.