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Finance

Should younger workers be paid more?

With political parties jostling for position amid a series of Elections, and the ongoing spectre of a snap General Election looming large, the Labour Party put forward a policy last week which has proved to be a talking point: increasing the minimum wage to £10 per hour, and extending this to workers under the age of 18.

The rationale behind it, according to the leader of the Opposition, is to end 'discrimination against young people', and adhere to the concept of 'equal pay for equal work'.

On the face of it, the policy doesn't sound too controversial. In April, the National Living Wage for those over the age of 25 rose to £8.21, and is set to increase to £9 next year. Conversely, those under the age of 18 have the floor set at £4.35, while for apprentices, the minimum wage slips even further to £3.90. 

It's a yawning gap by any measure, and such a policy would improve the lot of the average 17 or 18-year old worker to the tune of £2,500 per annum. So, what's the problem?

A hindrance to youth employment growth

As within any area of economics, nothing happens in a vacuum, and a shift in policy - particularly one as radical as this - would have consequences. In this case, the severe risk is an impact on youth unemployment, or, at the very least, a rise in youth underemployment. And experts have been quick to make their thoughts known.

“Clearly the risk, given the choice between doubling the wages you’re currently paying 16 and 17-year-olds or not employing them at all, is you will have fewer 16 and 17-year-olds in work,” commented Paul Johnson of the Institute for Fiscal Studies.

Sky News quoted a spokesperson for the Federation of Small Businesses as saying: "We must eradicate low pay. But politicians from all parties should not simply be competing in a tit-for-tat as to who can offer the most people the biggest hikes.

"Our research shows that the average small business has already seen £60,000 of increased annual business costs due to public policy changes since 2011. One in seven small employers has a team member aged 16-17, providing crucial opportunities for young people all over the UK - and changes must not lead to them losing their jobs, or hours, to afford an eye-catching political promise."

Many other employers have also pointed out that it invariably takes longer to train younger workers, and, in many cases, it can be months before they can bill customers for their time. An equal minimum wage would thus make 17 and 18-year olds all the more unappealing to hire and/or retain. Additionally, those who pursue apprenticeships tend to benefit from a large saving in terms of university fees and associated costs, thus going some way to compensating them for enduring a limited period of lower wages.

The flip side of the coin

Indeed, youth unemployment among the economically active in the UK has been on a downward spiral in recent times, plummeting from nearly 20 per cent in Q4 2013 to just 11.7 per cent in Q4 2018. Even by historical standards, this rate is incredibly low, and the UK ranks ahead of all but nine EU countries in this metric (and well below the EU average of 15 per cent).

We should therefore be loath to do anything which would stifle such momentum. But, at the same time, would any increase to the minimum wage for young workers necessarily have a detrimental effect?

One counter-argument is the very progress of the National Living Wage itself for those aged 25 or over. Since rising from £6.50 in 2015 to £8.21 today, the overall unemployment rate in this country has fallen from 5.4 per cent to new record lows of 3.8 per cent.

Interestingly, the UK also has one of the highest minimum wages in the world among workers over the age of 25. The latest increase to the minimum wage means it is now 59 per cent of the median hourly wage of £14 earned in Britain. Stacked against 2017 figures, this puts the UK fourth among industrialised countries - behind only France, Portugal and New Zealand.

The national minimum wage has also risen at a remarkably rapid rate, climbing from £3.60 when it was first introduced in 1999. Yet the unemployment rate back then was nearly 6 per cent, and, despite the financial crisis in the intervening years, it has fallen significantly since. 

So clearly, there is little or no evidence that hiking the minimum wage has hurt employment levels, and who's to say that positive results wouldn't be yielded by replicating a similar policy among younger workers? The Opposition have also added that they would lend targeted support to smaller businesses to assist them in meeting such wage costs, using savings from a fall in the fiscal outlay on in-work benefits to finance this.

A balanced view

Whether the idea put forward by Labour is a noble one, or one born of a desire for political one-upmanship, is open to debate. But there is surely at least a modicum of merit to it. After all, young people must still incur the same living costs as over 25s, so they are disadvantaged by a minimum wage which is barely half that of their older counterparts. 

Perhaps where the plan falls down is the extreme degree of it. To saddle employers with such a dramatic extra burden overnight - or at least within a short period of time - is going to inflate wage bills in an unsustainable way. There is a reasonable amount of goodwill among employers to pay workers fairly, but such measures, in isolation, will surely be a bridge too far for many small businesses, and it is young people seeking work who will ultimately pay the price.

Yet the proposal does provide the basis for further consultation. The minimum wage for under 18s back in 2015 was £3.79, so there has been some movement in the right direction. But, proportionally, young people have not seen their minimum wage rise at anywhere near the speed of those aged 25 or over. Whilst a gradual approach is sensible, one wonders if a bit more ambition could be shown.

The UK economy has been little short of a miracle in its ability to create jobs. That this applies across such a broad range of sectors and demographics is to be celebrated. Turning such progress into a political football is therefore wholly unwise. That said, a younger generation facing rising financial pressures may well be entitled to ask the question: can a bit more be done? 

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