Labour leader Ed Miliband has said he will give the Low Pay Commission (LPC) a five-year target to increase the national minimum wage to a set percentage of median hourly pay if he wins the general election in 2015.
A recent report for the Resolution Foundation suggested the government should set a medium-term target to raise the minimum wage to 60 per cent of median hourly earnings, from 55 per cent in 2012.
Labour has said it will announce the exact percentage nearer the election. It will also ask the LPC to work with trade unions and employers to raise productivity in low-paid sectors to help businesses fund big rises in wages.
The minimum wage is due to be increased from £6.31 to £6.50 per hour in October, giving more than 1 million workers a 3 per cent pay rise, the first real-terms increase for five years.
The proposal has elicited a hostile reaction from the British Chambers of Commerce, the Institute of Directors and the Confederation of British Industry, the latter dubbing it “political interference”.
So, do economists and fund managers see this as a major political risk in the UK? What are the technicalities of what Mr Miliband is suggesting, and could small businesses operate under such a regime?
Jeremy Lawson, chief economist at Standard Life Investments, says: “It’s not a political risk. Labour believes that wages have been rising slowly and that the low-paid have lost ground over the past five years when in fact the UK minimum wage is about the median for OECD countries,” he explains.
Mr Lawson says that instead of pushing the burden onto the business sector, Labour could increase wages through other means, such as raising productivity, innovation policies, greater incentives to work and tax credits.
“Wages should be more aligned to what’s going on in the economy. In sectors such as leisure and hospitality, the minimum wage is already 80 per cent of median earnings,” he says.
“Forcing higher wages on businesses would simply lead to a loss of jobs or a decrease in workers’ hours. Alan Buckle [who drew up Labour’s recommendations] thinks that if they raise the minimum wage it will increase productivity growth, but in some low-wage sectors it will be difficult to do this.”
Richard Jeffrey, chief investment officer at Cazenove Capital Management, says facilitating steady growth in the economy is the best way of improving incomes.
“Higher wages have got to be a consequence of sustainable economic growth. You have to be careful, in instituting income policies of any sort, that you don’t undermine the economy,” he warns.
Mr Jeffrey says the economic downturn did enormous damage to lower-paid workers. He argues that Labour should focus on policies that foster sustainable growth in the economy.
“Putting in place wage policies is not the same as creating jobs,” he says. “If you force up the pay of lower-paid workers through these sorts of mechanisms, the result is fewer of them are employed, because employers will invest in a piece of capital equipment to replace a percentage of workers.”