A MINIMUM wage is a convenient and effortless way for a left-of-centre government to appear to be doing something about the problems of poverty, public sector pay and the growth of unskilled employment. It is also largely ineffective at solving any of them. But Labour's proposed minimum wage would only be positively harmful if, as the Tories claim, it will reduce employment. The recent international evidence is surprisingly mixed. There are many estimates of the potential employment cost of Labour's minimum wage. Most of them are based on model simulations of the UK economy. All of them are, at best, semi-educated guesses; and probably not worth the effort. No-one knows whether, or how, introducing a statutory minimum wage would affect unskilled wages and employment. International evidence is a better source of clues on the likely effects of a UK minimum wage. The US, in particular, also has a large and highly competitive service sector employing many women and young people at relatively low wages. The federal government has increased the statutory minimum wage twice in the past two years, most recently in April 1991. Most US studies of the effects of the minimum wage over the past few decades have found a moderately negative impact on employment, mainly among young people. A recent study of the effect of extending the mainland minimum wage to Puerto Rico in 1974 found a more dramatic employment effect. By 1980 the federal minimum wage was 75 per cent of the average wage in Puerto Rico's manufacturing industry compared to 43 per cent on the mainland. Its unemployment rate rose from 11.3 per cent to 23.4 per cent between 1974 and 1983, of which over one third is estimated to be a direct result of the rise in the minimum wage. Yet a number of recent empirical studies of the effect of last year's rise in the US minimum wage fail to support this traditional view. One of the most careful, directed by Mr Lawrence Katz and Mr Alan Krueger of Harvard and Princeton Universities, surveyed the wage and employment practices of 314 Burger King, Wendy's and Kentucky Fried Chicken restaurants in Texas in August 1991. A third of them had also been surveyed the previous December, before the higher federal minimum wage came into effect in April. Over half of the restaurants had to raise the lowest wage they paid by the full 45 cent increase in the minimum wage. Only 5 per cent of restaurants were already paying more than the new minimum. The survey directly contradicts the conventional view that raising the minimum wage prices people out of jobs. On average, the restaurants that had to increase their wages by more tended also to have a larger increase in employment, as the right-hand chart shows. Each dot signifies one restaurant's growth of wages and full-time employment. There are many outliers; but the upward sloping 'best-fit' line between the dots indicates a positive, and statistically significant, relationship between higher mandated wage growth and higher employment. A 10 per cent wage increase is predicted to raise relative full-time employment by 25 per cent. The survey does not suggest that raising the minimum wage increases unemployment, at least among hamburger-flippers. One explanation is that fast-food restaurants can impose below-market wages on their existing employees but have to raise them to market rates in order to attract new employees. Only when the government mandates this general wage increase does expansion become profitable. But the result is not more skilled employment, as Labour would have us believe. Moreover, the same argument would not apply to internationally competitive industries; a similar study of textile companies could well give the more conventional result. But the US evidence does counsel against confident empirical generalisations. 'The effect of the minimum wage on the fast food industry.' NBER working paper 3997; 1050 Massachusetts Avenue, Cambridge MA 02138, USA.
A minimum wage is a convenient way for a left-of-center government to appear to be doing something about poverty. But Tories believe that would be harmful. The Conservatives have been trying to make the case against raising the minimum wage. International evidence is a source of clues as to how a minimum wage would affect unskilled wages and employment. A survey of fast food restaurants in the US, which has a large and competitive service sector paying low wages, showed that over half had to raise wages to meet the minimum. But the survey contradicts the view that raising the minimum prices people out of jobs.