Minimum wage hurt retailers during the downturn

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Britain’s flexible workforce has helped, but it’s not flexible enough.

The unexpected upturn in the number of people employed in Britain last month owes little to Labour government intervention, and almost everything to the flexibility of UK labour laws.

Perhaps the only element of Labour policy that has blunted rising unemployment is the colossal growth in public sector jobs over the past 10 years – almost none of which have been lost as the private sector workforce has borne the brunt of the downturn.

High street retailers have been among the hardest hit in terms of business volume and have reacted, quite rightly, by cutting their payrolls in whatever way they can.

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Full time positions have been turned into short term contracts. Hours have been cut. Overtime pay ended. Employees with decades of experience have been replaced with untrained apprentices.
Harsh as it sounds, none of these measures should be criticised. Survival in the face of the worst downturn in decades called for painful measures.

One employment issue that has rarely been mentioned during this testing period has been the minimum wage. At £5.80 for everybody aged over 22, this equates to an annual salary of over £12,000 for a full time employee working 40 hours per week.

Unlike some retailers, who can employ younger people for £3.57 for 16-18 year olds, and £4.83 for those aged 18-22, jewellers are less likely to employ young and untested staff to work around high value items that require experience to sell. They are therefore even harder hit.

Choices have been limited in ways for owners to cut the payroll. Shortening the hours of employees and working more hours on the shop floor has been the most common method.

This suits nobody. Owners are unable to think creatively about the business because they are serving customers all day. Employees lose half their wages if their hours are halved. Customers are likely to get worse service, potentially damaging the reputation of the store.

Even the government loses out because an employ working only 20 hours on minimum wage falls below the threshold for paying income tax and pays barely any national insurance.

Consider an alternative solution if the minimum wage were scrapped or reduced. The employee continues to work full time on 25 percent lower pay, earning £9000 before tax. Tax and national insurance would total £867 (plus £420 employer’s contribution to National Insurance) for the year, so take home would be £8133 or £678 per month.

After tax and national insurance, the employee would be £172 per month worse off, compared to over £450 worse off remaining on the minimum wage and working half as many hours. That’s a body blow, but not a knockout punch for most.

At a part time salary of £6000, the government receives only £68 for the entire year in national insurance (no income tax), compared to £1287 in tax and national insurance when an employee earns £9000.

Since the government pays benefits to top up incomes of the lowest earners, the net loss to the treasury is even greater.
There is a great temptation in the current climate to say that free markets have failed and we need more regulation and government control. I continue to argue to the contrary.

Flexibility in the labour market has been beneficial to the overall economy during the recession, but even more flexibility would have been even better.

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