Some have suggested that radical solutions are needed to kick-start the economy, including the Daily Mail which, amongst other recommendations, recently suggested abolishing the minimum wage for those below the age of 25.
This approach is not the answer. When similar measures have been taken in the past as they were in Finland, jobs were not created as a result. In challenging times, young people (who often occupy jobs in low paid sectors) should not be penalised, particularly because measures such as these would be counter-productive anyway.
Research that my colleagues and I conducted at Middlesex University for the Low Pay Commission (LPC) has recently confirmed that firms' productivity has risen with the increases in the national minimum wage (NMW) since it was brought in. Our first of its kind study looked at the effect of the NMW on productivity in low paid sectors such as cleaning, nursing homes, security and retail.
At a time when the country needs productivity levels to be pushed higher, chipping away at the NMW in the hope of a short term gain isn't the right way forward. This year the increase to the NMW was in line with the LPC's recommendations to the Government. The adult rate increased from £5.93 to £6.08 per hour; the Youth Development Rate and the rate for 16-17 year olds also increased, but by a lower proportion. The lowest paid young workers are therefore having only a very modest increase anyway.
Our research showed that productivity rose with the NMW in all low paying sectors across the years. Employers found efficiencies that more than offset the NMW increases. The effects were strongest in larger companies, where efficiency could be increased most and where HR departments could help use labour more effectively.
While NMW increases boost productivity and efficiency levels, the psychological effects of raising the NMW must not be overlooked. As Polly Toynbee regularly points out, in our society low pay means low status. The psychological effects of poverty in work are unquestionably negative, as many studies show. HR professionals know only too well the significance of negative staff mentalities and low self-esteem and the bad effects these can have. Willingness to get involved in training and to take initiative at work can be the result of feelings of higher self-esteem. When society says it values young workers, this has positive effects for them and their employers.
We have come a long way since the inception of the NMW, which has now moved from being a matter of fierce political debate to acceptance by all political parties. When it was first introduced in 1999 many argued that it would have a negative effect on employment. This has clearly not happened and there is no need to revert to pre-1999 thinking now. As our study shows, it has had positive effects for companies as well as for those receiving it.
We have to work our way out of the current economic climate and increasing productivity is key. If increases to the minimum wage are too conservative, we are in fact potentially hampering our economic recovery and giving young people too little at the same time.
Richard Croucher (pictured) is associate dean of Middlesex University Business School
