Guest Post: Lessons from the UK for Ending Poverty Wages in the US

Editor’s note: This guest post was written by Calum Montell-Boyd, a student at the University of Oxford and editor at OxPolicy, a student think tank at Oxford. He was an intern with the Asset Building Program in the Summer of 2013.
 
As the United States marks the 50^th anniversary of the War on Poverty, low wages remain a problem not just throughout the nation but across the developed world. America’s working poor are counted at over 10 million, while across the Atlantic, in London, one in five workers isn’t making enough to meet basic living expenses. From this perspective, it comes as good news that the UK Treasury has backed an increase in the minimum wage, from £6.31 ($10.37 USD) to £7.00 ($11.50 USD). This announcement from the United Kingdom comes at the same time as US policymakers are considering similar legislation that would raise the federal minimum wage to $10.10.
 
In Britain, more people than ever rely on payday loans to meet even basic, routine expenses like paying the mortgage, and there are worries over predatory practices on both sides of the Atlantic The consistently low minimum wage has been making it harder for those on low incomes to build assets and climb out of poverty. Perhaps that’s why the UK public overwhelmingly supports a real rise in the national minimum wage, just as a majority does in the US. These nations wouldn’t be the first among developed nations to move down this path of improving wages among their neediest citizens. In November, Germany approved a national minimum for the first time.
 
But what about the structural effects of an increase? The most powerful criticism of raising the minimum wage is that while an increase works just fine for those being paid the minimum wage now, it makes developed economies less competitive overall, and may stop businesses (big or small) from hiring new workers. But at least in terms of the public finances, the UK Treasury estimates the cost of a big rise would be negligible. Furthermore, the most recent empirical research, conducted in the US, suggests that modest minimum wage increases actually have “no discernable effect” on employment. In practice, employers who hire at the minimum wage can adjust to the minimum wage. Employers can benefit from increased efficiency and reduced labor turnover as a result of an increase and can adjust for costs with modest price increases and “wage compression,” whereby the highest earners take a small income cut to offset rises at the bottom.
 
What about competitiveness? Could a higher minimum wage hurt developed economies competing in a “global race” with emerging nations like China? Well this isn’t even really the right way to think about this issue. If developed nations really wanted to be competitive, they would need to set the minimum wage at around $1.20 USD, or 73 pence an hour. That’s the average across China’s different regional minimums. When we speak about bringing jobs back to the US, we don’t mean jobs in manufacturing that pay $1.20 an hour.
 
At a time when low-wage workers in both the US and the UK struggle to get ahead and build assets with tightening budgets that often barely cover today’s basic necessities, an increase in the minimum wage offers a way to alleviate not only current financial woes, but also begin to build long-term financial stability. The evidence just doesn’t support the position that minimum wage increases are bad for the economy, and even if there are some effects, the benefits of doing so far outweigh the negligible costs. The time is right for an increased minimum wage in both the UK and the US.