The SNP believes that the scale of its victory at the General Election amounts to a mandate for the devolution of further powers (beyond those recommended by the Smith process) to the Scottish Parliament. In particular, they have called for devolution of powers over the minimum wage, both in their election manifesto and in subsequent announcements.

 

Since the national minimum wage (NMW) was introduced in the UK in 1999, evidence suggests that it has helped to reduce wage inequality by improving the wages of the lowest paid relative to the median. At the same time, there is little if any evidence to suggest that the NMW has led to a fall in employment, as some feared it would.

 

There are at least two reasons why the introduction of the NMW has not led to a fall in employment. One is that it can make employees more productive, and reduce turnover of staff, providing benefits for the employer. The other is that there has been a shift in the balance of power in recent decades from employees to employers as a result of labour-market deregulation, deunionisation, the erosion of national pay-bargaining, and the increase in labour supply engendered by higher levels of conditionality and sanctions in the benefit system. All of these factors put downward pressure on wages, with the minimum wage providing only partial countervailing power in the other direction.

 

In many ways there is a good case for devolving the minimum wage within the UK. Wages vary substantially across the country, so a national minimum has very different effects in London than in Wales. And a large proportion of minimum wage employees work in ‘non-tradable’ service sectors such as retail, care and personal services which rely on face-to-face transactions and thus cannot easily be transferred away from the customer base. Indeed, US and Australian Statesstates, and Canadian Provincesprovinces, have the power to set a higher minimum wage than that mandated by the national government. 

 

But what scope would there be to raise the minimum wage in Scotland, if it was devolved? One way to think about this is to consider the ‘bite’ of the minimum wage, where the bite is the minimum wage as a percentage of the median wage for a full-time worker. In 2014, the NMW of £6.50 was 49% of the median full-time (FT) Scottish wage of £13.23. The minimum wage in Scotland is broadly average in relation to international comparators. In Germany, the Netherlands and Ireland, the bite of the minimum wage is also around 47-48%. In the US, the bite of the minimum wage varies from 31-57% across cities and Sstates. The minimum wage bite in Australia is higher, at around 54%. Of Among European countries, France has the highest bite at 62%. Scandinavian countries do not have a statutory minimum wage; instead they have far more comprehensive collective wage bargaining arrangements across industries.

 

A recent review of the NMW in the UK recommended that the medium term ambition for the NMW should be for it to reach 60% of the UK median wage, as this level would be unlikely to have negative employment effects. But the Committee was explicit that the 60% target refers to the median wage for all workers, not just FT workers (the median wage for all workers in Scotland is £11.76 compared to £13.23 for FT workers only).

 

On this basis, if the minimum wage was devolved to Scotland and a similar level of ambition were applied, it might be argued that there is scope for a small increase in the minimum wage in Scotland without major negative employment effects: 60% of Scotland’s median is around £7.06 (equivalent to 54% of the FT median). (If the minimum wage was devolved to Scotland, responsibility for recommending a level for it would presumably reside with a committee with employer and employee representative organisations, along the lines of the UK Low Pay Commission). But regardless of the specific level of a Scottish minimum wage, there are at least a couple of complications.

 

First is the interaction with working tax credits (WTC), assuming WTC remain reserved at Westminster. For workers currently eligible for WTC, a higher minimum wage will, in some cases, shift some of the costs of their employment from the government (via reduced WTC payments) to the employer. But the benefit in terms of reduced WTC expenditure (and higher national insurance contributions) will flow to the Westminster Government. (These arguments will also apply to Universal Credit, once it has replaced WTC.) If a strict interpretation of the Smith Commission’s ‘no detriment’ clause is applied, the Scottish Government might argue that it should receive some form of transfer payment from Westminster to reflect the value of the Exchequer saving.

 

The second complication is the extent to which the higher minimum wage would address poverty. As already noted, not all of the benefits of a higher minimum wage are likely to be felt by employees, as some of the effect is simply to transfer costs from government to the private sector. More importantly, a large part of the reason why rates of in-work poverty are increasing is because of the growth in part-time, temporary and insecure working arrangements which mean that many employees are not working the hours they would like; increasing hourly pay can only go so far in addressing this problem. And as well as the growth of ‘zero-hours’ contracts and part-time working for employees, there has been growth of so-called ‘false’ self-employment via ‘umbrella companies’ – the use of self-employed agency workers who do not have to be paid the NMW, in place of employees. (It is also worth noting that around a third of low-paid workers live with partners who are not low paid, thus a higher minimum wage doesn’t only benefit the lowest-paid households.) 

 

There are good grounds for devolving responsibility for the minimum wage to the Scottish Government, and a good case for saying the minimum wage should be higher than it is currently. But a higher minimum wage is not a panacea for addressing in-work poverty. It needs to go hand-in-hand with a wider strategy for addressing low pay, including aspects of employment law which are currently reserved to Westminster. Attempts to devolve the minimum wage would also need to consider the interaction with in-work benefits, in terms of both the incomes of the low-paid, and the distribution of Exchequer benefits between the UK and Scottish governments.