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Things not to do: Substantially increase the Minimum Wage

Summary:
When the Minimum Wage was first introduced, some analysts predicted that it would increase unemployment, particularly for young people and those from ethnic minorities, as it had repeatedly done in the US where it was set above the level that some people's labour was worth to employers.However, the UK level it was set at was sufficiently low to avoid this effect. Indeed, it was widely criticized as far too low by many of those who had campaigned for it. It has been raised several times, and when Chancellor George Osborne decided to match the Opposition commitment to the 'Living Wage,' it headed to the level where it could prevent people from getting a first low-paid job that would set them on a course to work their way up the employment ladder by gaining on-the-job experience.Analysts note

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When the Minimum Wage was first introduced, some analysts predicted that it would increase unemployment, particularly for young people and those from ethnic minorities, as it had repeatedly done in the US where it was set above the level that some people's labour was worth to employers.

However, the UK level it was set at was sufficiently low to avoid this effect. Indeed, it was widely criticized as far too low by many of those who had campaigned for it. It has been raised several times, and when Chancellor George Osborne decided to match the Opposition commitment to the 'Living Wage,' it headed to the level where it could prevent people from getting a first low-paid job that would set them on a course to work their way up the employment ladder by gaining on-the-job experience.

Analysts note that every time it is raised, the supermarkets increase the number of automatic checkout machines that enable them to employ fewer staff. A similar effect is seen in other businesses, where it becomes cheaper to automate than to pay higher wages to employees with relatively low productivity levels. A substantial further increase in the Minimum Wage would increase the number of people that it would be uneconomic to employ.

The problem for the low-paid is not so much that employers pay too little, but that the government takes too much. At a mere £8,164 per annum, the government starts charging National Insurance at 12 percent. At only £11,500 per year it starts charging income tax at 20 percent. Add the amount the government takes in VAT, insurance taxes, stamp duty, airport departure tax, fuel duty, alcohol duty and tobacco tax, and it adds up to a huge slice of a low-paid persons’ earnings.

Take-home pay, the figure that matters most for the low-paid, could be increased if the thresholds for National Insurance and Income Tax were harmonized and raised to a level that look low-paid people out of taxes on their income altogether. Take-home pay could be further raised for young people starting out in low-paid jobs by levying a lower youth rate, certainly for National Insurance, and possibly for income tax, too.

Dr. Madsen Pirie

Dr Madsen Pirie is President of the Adam Smith Institute, and was one of three Scots graduates working in the US who founded the Institute in 1977. Before that, Madsen worked for the House of Representatives in Washington DC, and was Distinguished Visiting Professor Philosophy at Hillsdale College in Michigan.

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