The minimum wage should not be the same for everyone

The worst job ad I ever saw still sticks in my mind: “Security guard wanted — £1 an hour, 100 hours a week. Supply your own dog.” As chair of the Low Pay Commission, setting Britain’s first minimum wage, I developed a habit of reading such adverts from temp agencies. The paltry pay was a powerful motivation in our work. Far from being an isolated case, exploitation like this was widespread even as the millennium approached.

The minimum wage, 15 years old today, has all-but abolished such Dickensian practices. Of course evasion persists. Too many workers still don’t get the legal rate. But make no mistake: extreme low pay has shrivelled in the glare of the law. Back in 1997, 7 per cent of all workers earned less than half of median pay—the equivalent of £5.70 an hour today. Now that figure is 1.5 per cent, almost all of whom are young people on the lower youth or apprentice rates. Meanwhile 15 years of experience and academic research has taught us definitively that the minimum wage has not cost jobs.

Yet while I look back with pride on the 15th anniversary of the Minimum Wage Act I also fear the policy is losing its early promise. It treats successfully the most acute cases of extreme low pay. But a broader epidemic of chronic low pay has taken hold. One in five workers earn less than £7.50 an hour, equivalent to £13,600 a year. This is above today’s legal minimum of £6.19 an hour and far more than today’s Gradgrinds would pay given half the chance. But it is quite simply too little for a basic standard of living. The costs fall not just on the low paid themselves but on all taxpayers. The bill from low pay is now upwards of £2 billion a year from in-work benefits and lost tax revenues.

This problem cannot be solved by simply raising the National Minimum Wage to the Living Wage of £7.45 an hour, as some would argue. While the minimum wage has not yet caused unemployment, pushing the rate too far could hurt young and part-time workers (particularly women) and low-paid regions. In truth, the minimum wage we designed in the late 1990s is not fit to tackle the problem of low pay we encounter today. Its effects are too narrowly felt, doing little to nudge up pay for those on £7 or £8 an hour. And the design of the main adult rate, as a single national figure, may well be too blunt.

The challenge then is to amplify the minimum wage in smart new ways, pushing employers to pay more where they could afford to. Just as the minimum wage was a bold experiment 15 years ago, this will require creative thinking. Take the decision we made to keep things simple by setting only a single national rate. In the policy’s formative years this simplicity was essential. But it also limits what the minimum wage can achieve. It’s time to ask if a higher rate should be set for sectors that could afford to pay more. Banks in London, for example, could clearly pay a higher minimum wage than hairdressers in Newcastle.

In the late 1990s we were similarly cautious when it comes to how the minimum wage should be set. The Low Pay Commission was established to review the rate each year, constantly re-assessing whether damage had been done. With no strong evidence-base, this backward-looking approach was inevitable. Now we can be more ambitious about our long-term goal. Of course you can’t just hike up wages without reflecting on the economic context. But in other areas of policy, and ones that are just as difficult — think of inflation or public borrowing — the Government has set out clear goals and has built institutions (from the Monetary Policy Committee to the Office for Budget Responsibility) to help to achieve them. Why doesn’t the problem of low pay deserve the same?

Innovations like these aren’t easy or uncontroversial. Nor could we have made these decisions 15 years ago. But this is 2013 not 1998. For all the success of the minimum wage, today’s epidemic of low pay won’t be solved by resting on successes but by building new solutions just as radical as the minimum wage was in its youth. Back then it had much early promise. To deliver on this promise it will need to grow up.

Professor Sir George Bain is chairing the Resolution Foundation’s review of the minimum wage

This article originally appeared in The Times