Wednesday, October 18, 2006

U.K. Minimum Wage And Unemployment Increases

Britain is widely considered to have a flexible labor market. And that is still true when it comes to "hire and fire" laws which is relatively free compared to continental (Western) Europe, just as in the U.S. and Denmark. But in another crucial aspect, the U.K. labor market is increasingly unfree.

While the U.S. debates over whether to raise the minimum wage from its current level of $5.15 on the federal level,the U.K. have already raised it to 5.35. £5.35, that is. At current exchange rates this means that the U.K. minimum wage is nearly $10 per hour, only slightly lower than in France, where it is set at €8.27.

After it was first imposed by Tony Blair's "New" Labour in 1999 at £3.60 per hour, it have been steadily increased. This year it was raised another 6%, from £5.05 to £5.35. This is not only a higher rate of increase than inflation, but also a higher rate of increase than average hourly earnings. That means that the U.K. minimum wage should be expected to destroy an increasing number of jobs.

Not coincidentally, we now see how unemployment is increasing in Britain, despite the fact that Britain is not undergoing any cyclical downturn. The fact that unemployment increases despite a (albeit only a mild one) cyclical upswing indicates that the entire increase is structural. Indeed, the structural unemployment rate may even arguably be rising even more than the actual rate considering the cyclical upswing.


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