pounds 4.15 an hour - good money for accountants

Alec Reed looks at the practicalities of introducing a minimum wage

The minimum wage debate has existed primarily in the realms of the theoretical, with arguments about the effect on unemployment bouncing back and forth like a tennis ball. There is evidence showing that unemployment would rise, but this is countered with research suggesting exactly the opposite. The economic theory will not help us to resolve matters. We will see what happens to the supply and demand of labour only when a minimum wage is actually introduced. At this stage, it is the accountants who must consider, and iron out, the practicalities.

Employers are confused: would a minimum wage include fringe benefits such as statutory sick pay and maternity pay, three weeks' paid holiday and redundancy benefits? Temporary workers do not enjoy such benefits at the moment: presumably, their pay would be governed by the minimum wage, but would that include the additional perks? The implications to employers are huge.

The cost of living varies tremendously from region to region. A minimum wage would not. So the benefits to workers in a low-cost place such as Middlesbrough, for example, would be far greater than the benefits to those living in London. To benefit all low-paid workers everywhere equally, a minimum wage would really need to be weighted, and working out these weightings would be a complicated task.

A minimum wage is supposed to represent the minimum on which a person could be expected to maintain a decent standard of living. Let us assume that it should be set at pounds 4.15 an hour. Someone on this wage working 40 hours a week could, under the present system, pay around 13.5 per cent of his or her earnings in income tax and take-home pay would be pounds 3.59 an hour. There are two points here. The first is that by setting a minimum wage, a government would earn greater revenues from income tax. But it is employers who would foot the bill. If a government wanted to ensure simply that people took home pounds 3.59 an hour, it should set an untaxed sum of pounds 3.59. The second point is that while a full-time worker would take home pounds 3.59 an hour, a student working part-time (or a foreigner working part of the year) and paying no tax would get the full pounds 4.15. There is clearly a problem here; a minimum wage should not be taxed.

That in itself would create another problem. In many companies there is a strict hierarchy based on wage differentials. The introduction of a minimum wage would throw this into confusion. Opponents to the minimum wage bemoan the cost of raising the wages of those who are paid less than the level at which the minimum is set.

But this is only half of it. To continue with the hypothesis that the minimum is set at pounds 4.15 an hour, what would be the reaction of somebody already earning that? Suddenly, he would find himself at the bottom of the wage pile, earning the same as the least experienced people in the company. An important psychological structure has been removed and the worker would understandably demand higher wages, perhaps another pound an hour. Then the company would face demands from workers on pounds 5.15 an hour. The effects would diminish further up the pay scale but it would be costly to maintain the hierarchy. Again, taxation of low-income levels would be called into question.

To complicate matters further, where the minimum wage exceeds the market wage, a gap would be created. This would soon be filled by workers in the black economy who, while they were forced to go without basic employment rights, would avoid paying income tax and National Insurance. Many would continue to claim unemployment benefit and the - potentially enormous - costs would be met by taxpayers.

Would it lead to an increase in unemployment or not? That debate will continue until someone actually gives it a go. The labour market is so diverse, and so fraught with anomaly, that the introduction of a minimum wage is not simply a question of whether unemployment will rise or fall.

What can be certain is that it would keep accountants busy: a minimum wage would have to be accompanied by a dramatic change in the income-tax system at lower levels. The many practical obstacles are surmountable: if the wage is set at a modest level and gently tweaked upwards, it would work, but the unions will have to exercise patience.

The writer is chairman of Reed Personnel Services and Professor of Innovation at Royal Holloway College, London University.