Youth minimum wage interview

Omar Salem interviews David Coats on the youth minimum wage

Coats_davidThere has been a vibrant debate about the youth minimum wage and whether it should be equalised with the adult minimum wage. Details of the current minimum wage rates are here.

Compass Youth recently held a meeting on the subject at which David Coats (right), a former member of the low pay commission and now associate director of The Work Foundation, spoke.

I asked David Coats to take part in an interview on the youth minimum wage for this blog. You can read the interview below. He opposed equalising the youth and adult minimum wage, saying doing so would "place the most vulnerable young workers at a much higher risk of unemployment" and that "we should not implement policies that place the most vulnerable at risk".

David Coats' interview is the first in a series of interviews and posts on young people, wages and unemployment I hope to have on this blog. Next, Raj Jethwa from the TUC will be responding to the points raised by David Coats about the youth minimum wage.

INTERVIEW WITH DAVID COATS

Do you think the youth minimum wage should be equalised with the adult rate? If not why not?
[Coats, David] No, it should not. To pay the adult rate at 18 would place the most vulnerable young workers at a much higher risk of unemployment. To offset these risks it is inevitable that the Low Pay Commission would let the NMW fall in real terms. The choice is clear. We can either have a very low NMW, which is paid at the age of 18 or we can continue to have an adult NMW that compares favourably with much of the developed world (see charts below).

What evidence do you have to support your position?
[Coats, David] There is evidence from other developed countries (the USA, France, Spain) that paying the adult minimum wage at 18 can have an adverse effect on youth employment. The effects are small - in the region of a 1-3% reduction in employment, but bear in mind that an experience of youth unemployment has a scarring effect which lasts throughout an individual's working life. Early unemployment fundamentally affects a young person's life chances and the life chances of their children. It is also important to understand that youth unemployment is higher than adult unemployment. We should not implement policies that place the most vulnerable at risk.

Comparison of minimum wages across countries, measured by purchasing power parities, 2000-04 (£). Click on chart to see full size.
Source: Low Pay Commission

Min_wage_across_countries

Adult minimum wages as a % of median earnings - the “bite” of the minimum wage across countries, 2000-06. Click on chart to see full size.
Source: LPC reports and government evidence to the LPC (2006)Adult_min_wage_median_earnings

What effect does youth unemployment have on the young people involved and society in general?
See above. If we are concerned about equality and social mobility then we should not be adopting policies that, however well intentioned, limit the prospects of the most disadvantaged.

What do you say to people who suggest that the argument that raising or equalising the youth minimum wage will result in unemployment is the same one the Tories used against the minimum wage - the Tories were proved to be wrong in that case, so unemployment won't result by increasing the youth minimum wage?

[Coats, David] The Tories had no evidence to support their ludicrous job loss predictions. Even in the early 1990s the most critical analyses found that minimum wages had "ambiguous" effects on adult unemployment. There was no empirical basis for the Tory argument and nor was there any reputable evidence to justify their abolition of wages councils or the abandonment of fair wages policies in public procurement.

On the other hand, there is robust evidence that minimum wages, inappropriately applied, can have an adverse effect on youth employment - the research has been done by economists who are generally positive about the benefits of the adult minimum wage. I'm about to publish a paper explaining the economic theory and describing the practical experience - check out The Work Foundation's website after 7/3/07.

All economic theories predict that a minimum wage will cause job losses at some point - hence my objection to the conversion of the NMW into a so-called "living wage" and the abolition of youth rates. Supporters of the NMW need to recognise some of these basic realities and understand that there is an upper limit beyond which the NMW should not go.

How big a problem is youth unemployment? What do you think should be done to reduce it?
[Coats, David] Youth unemployment is much less of a problem than it used to be. In that sense government policies have been successful. However, for the individuals without work the experience is no less devastating. The challenge is to offer people meaningful opportunities for skills development and genuine routes out of poverty. John Denham's idea of an Advancement Agency is a very useful way forward - see here. The UK economy is continuing to generate lots of jobs and has a huge appetite for migrant labour - if we can ensure that unemployed young people are "job ready" then there are plenty of employment opportunities available. However, we should not underestimate the challenge and we need to adopt a holistic approach. Many of these young people will be suffering from multiple problems: drug and alcohol dependency, low skill levels, mild to moderate mental illness, poor social skills, low self-esteem, bad housing and a poor environment (high crime rates). Improving the prospects of the most disadvantaged also depends on much earlier intervention, which is why initiatives like Sure Start are so important.

London has higher unemployment than the national average, why do you think this is? What should be done about it?
[Coats, David] See above - London just has more communities experiencing these multiple problems.

Don't you think there is an argument of basic equality and fairness that people should receive equal pay for equal work? How can we justify paying a younger person less than an older person for the same job?

[Coats, David] Yes the argument from fairness is persuasive and trade unions have been successful in eliminating age based rates from collective agreements. But the case I am making is slightly different. Why should we pay the adult rate at 18 if the consequence is higher unemployment for the least advantaged?

Might there be a role for tax credits to ensure that young people on wages below the adult minimum wage are not left worse off than adults on the minimum wage?

[Coats, David] We might be using a sledgehammer to crack a nut here. I'm not sure that there is a case for another layer of complexity in the tax credits system and the numbers of young people we are talking about is v small - and most of them are living at home rather than living independently. I would prefer to invest additional public funds in skills development for this group rather than in income support - although I'm open to persuasion.

What do you think about living wage campaigns?

[Coats, David] They should be supported. Essentially, the Living Wage campaigns promoted by TELCO, London Citizens etc are about responsible procurement by large multi-national companies. Why should an outsourced cleaner in an investment bank be paid a pittance? The argument here is the same argument that was used to justify responsible procurement by the public sector in the late nineteenth century, when the first fair wages resolution was adopted by the House of Commons - the reputable should not be doing business with the disreputable. Another important point is that most of these campaigns have been aimed at the purchaser of the service. In other words, it is the large investment bank saying to its cleaning contractor: "we are willing to pay a higher contract price so that you can pay your cleaners more". There is no risk of undercutting, all contractors are on a level playing field and therefore "living wages" pose no threat to "competitiveness".

Don't you think it is the responsibility of employers to pay a decent wage, especially if they're making big profits?

[Coats, David] Yes. If an employer wants to retain their legitimacy in the eyes of the public they should pay decent wages, especially if they are highly profitable.

What do you think your biggest achievements on the low pay commission were? What could you have done better?

[Coats, David] Not sure this is a question I can answer. Obviously I would have liked higher increases in the adult rate at an earlier stage in the process and the payment of the full rate at 21 rather than 22. With hindsight though the process worked well, the LPC has been a success and we should celebrate that - not "my" achievement, but the achievement of the whole Commission, including my friends on the employers' side of the table.

Polly Toynbee recently suggested (picking up on Nick Isles of the Work Foundation's suggestion) that the low pay commission should become a "pay commission", what do you think of that suggestion?

[Coats, David] Not a bad idea. But the resistance is likely to be huge. I've advocated a lot more transparency in pay as a way of using the power of public embarrassment to shame executives into accepting their responsibilities. Company annual reports must include an explicit statement of executive pay policy explaining precisely why a chief executive is worth a colossal sum. Moreover companies should be required to publish the distribution of pay across the organisation with details of the numbers of employees on each pay point. Publishing the ratio of top pay to bottom pay would also be a useful innovation.

This will all help a bit, but it does little to place any restraint on the "global superstars" (the top tenth of the top one per cent of the income distribution) who are racing away from the rest of us. Achieving a more egalitarian society is about wages, transfer payments, taxation and self-restraint at the top. Social norms limiting income inequality weakened during the 1980s and 90s and we need to rebuild them - although income inequality has fallen in the UK since 2001, largely as a result of the increases in the NMW and other redistributive policies (see chart) so that income inequality is now at a level last witnessed in the late 1980s.

Income inequality 1980-2005 (gini coefficient). Click on chart to see full size.
Source: ONS

Income_inequality

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