Six years ago, Britain began an experiment that was called “bold” by some economists and “reckless” by others. George Osborne, then Conservative chancellor, announced the minimum wage for over-25s would accelerate sharply to reach 60 per cent of median hourly pay by 2020. His decision was linked to his determination to cut welfare spending. But he also argued the intervention would boost the economy’s stubbornly poor productivity performance.
That argument about productivity has become increasingly popular since then as more countries contemplate higher wage floors. It is easy to see the allure in the notion that one good thing (better pay for those at the bottom) can lead to another (a stronger economy overall).
The idea is that if employers are no longer able to rely on cheap labour, they will have to invest more in capital or increase workforce productivity with better technology or training. It also has some empirical support. One paper has found that Germany’s minimum wage increased productivity after its introduction in 2015, albeit by driving some smaller companies out of business.