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FEATURE - Britain braced for minimum wage

LONDON: On Thursday almost two million of Britain's poorest workers will see a small increase in their weekly pay packets thanks to the minimum wage.

The government hopes the policy, along with its new working families tax credit and historically low 10 pence starting rate of income tax will lift at least some Britons from the poverty trap.

But will it really be that simple?

Will the minimum wage prove a panacea for poverty, or a crude, counter-productive government control that smacks of the traditional socialist Labour Party of old?

The danger, say the free-market economists, is that as the price of labour increases, demand for it will decline. Jobs will be lost leaving fewer people better off than before.

The independent think-tank Business Strategies estimates that up to 80,000 jobs will go in this way over the next three years.

But, counter the interventionists, at 3.60 pounds ($5.82) an hour the wage floor is low enough to prevent mass job shedding, but high enough to make a difference to those at the bottom of the income scale. The rate will be three pounds for those between 18 and 21.

The minimum wage, to be introduced on April 1, is a key plank of the Labour government's determination to get Britons off welfare and into work. It is just one of a cocktail of measures to shake up the labour market, including a raft of European legislation to improve working conditions.

Its introduction, which brings Britain's wage policy into line with most other industrialised countries, has been relatively trouble free so far.

There have been none of the rows which might have been expected from an electorate more used to Thatcherite free market economics than left-wing interventionism.

TOO SOON TO BE SURE

But it is too early to be confident of success, say economists.

John Philpott, a director at the Employment Policy Institute, estimates that some 200,000 small firms will find the minimum wage difficult to live with, particularly service sector companies such as hairdressers and caterers.

One danger is that all the firms that were keeping unnecessary staff on the payroll because they anticipated only a short, shallow economic slowdown, may now find the burden too great and start shedding employees.

On the other hand, it may encourage firms to squeeze more efficiency out of their workers, helping to lift the country's flagging productivity.

Either way, Philpott says the implications for employment overall were limited.

"On the employment side, because it's being set at a relatively low level, the impact is not likely to be great," he said.

INFLATION

Economists were also relatively sanguine about the inflation implications.

The Bank of England's rate setting Monetary Policy Committee has had months to assess what will probably be a one-off impact from the policy. And in any case, the wage floor is being introduced in the middle of an economic slowdown when inflationary pressures are particularly weak, say economists.

James Nixon, a research fellow at the London Business School, said the impact on inflation and interest rates was likely to be minimal, despite risks of a knock-on effect on earnings further up the chain as employees try to maintain differentials.

"The Bank will be keeping a keen eye on things, especially with the recent reintroduction of average earnings which has put wages back at the centre of attention," he said.

Bank of England deputy-governor Mervyn King said last August that the minimum wage would add around 0.5 percent to the level of earnings growth in Britain and slightly less to the price level.

"(It is expected) to have a small but temporary impact on the measured inflation rate over the next year or so," he said.

But the inflation equation is far from simple and throws up more questions than it answers at this stage.

For example, how will companies absorb the extra cost of the minimum wage? If they pass it on to customers in the form of higher prices, it may wipe out any benefits the low paid may have enjoyed.

But equally, if firms try to absorb the higher wage bill by squeezing profits, pensioners whose incomes depend on share prices, for example, may suffer.

Apart from the unknown of how the labour market will react to the myriad reforms about to hit it at once, the wage floor could end up being a scapegoat for job losses that would have happened anyway as the economy slows, say experts.

"There will be a tendency for the minimum wage to get blamed for problems it's not responsible for," said Philpott.-Reuters