‘Failing to succeed’: the role of Cambridge economics in making the case for the minimum wage

According to the Cambridge economist John Maynard Keynes, the problem facing policy makers in democracies ‘is to combine three objectives: economic efficiency, social justice and individual liberty’.  Labour lawyers and trade unionists might agree on the last two, but the first is more contentious.  This is perhaps because of the recent dominance of neoliberal understandings of the economy.  According to this logic, ‘efficiency’ is to be equated with profit, and with the kind of market-led growth which its proponents insist requires the elimination of labour law rules as ‘rigidities’ and ‘distortions’.  An alternative tradition in economics, associated with the Cambridge school, sees it as a practical discipline aimed at improving social outcomes; as Keynes’s near contemporary A.C. Pigou put it, there is no efficiency in a world characterised by ‘the sordidness of mean streets and the joylessness of withered lives’.

A focal point for debates about the economic effects of labour laws is the minimum wage.  Britain has had a national minimum wage (NMW) since the late 1990s, as a result of legislation introduced by the Blair government.  The NMW is a valuable measure which has brought about a narrowing of wage differentials, without harming employment.  It is, however, a limited one when compared to its counterparts on the mainland of Europe, such as the French SMIC.  The NMW is expressed as a series of hourly rates, whereas the SMIC sets weekly and monthly minima, thereby coming closer to being a true living wage.  The legislative design of the SMIC ensures that it keeps pace with increases in both prices and wages across the economy; there is no such provision for automatic uprating with the NMW.

The British model is as limited as it is because of choices made at the time of its introduction.  Reflecting orthodox economic theory, the design of the National Minimum Wage Act 1998 is premised on a narrow ‘market failure’ logic for state involvement in wage-fixing.  Yet things could have turned out very differently.  There is a pre-history to the NMW, now largely forgotten, which demonstrates the role that progressive economics can play in shaping labour law policy.

After World War Two, Cambridge economics, influenced by Keynes, set out on a distinctive path. Economics, he had argued, should be based on realistic models of the world, and public-facing in the sense of being engaged in projects which benefited society as a whole.  Keynes’ vision was realised in the foundation of the Department of Applied Economics (DAE) as a stand-alone research unit within Cambridge University, devoted to macroeconomic modelling with the goal of full employment in plain sight.

Among the projects conducted in the DAE in the 1970s was a study of the system of partial minimum wage fixing through the Wages Councils which by that point had been in operation for several decades. The DAE study found that low pay was prevalent across the British economy, and not just in industries with statutory Wages Councils.  Its authors argued for a national minimum wage to be fixed by law, with trade union involvement in its setting and administration.

The DAE report appeared just at the time the post-war consensus that had shaped employment and social policy in Britain was coming to an end.  Now the route to economic growth lay through labour market flexibility.  Far from strengthening statutory wage fixing, the Thatcher government which came into office in 1979 set about dismantling it.  Inequality grew, and a low pay, low productivity cycle became an embedded feature of the British economy.

Up until the mid-1980s, most British trade unions opposed the introduction of the statutory minimum wage, viewing it as a threat to free collective bargaining. But sentiment began to shift, with certain unions, notably NUPE (later merged into UNISON), taking the lead.  NUPE officials came to the view that there was only so much that could be achieved by collective bargaining for low-paid workers, in the absence of a legal floor. The case for a statutory minimum was made by their influential general secretary, Rodney Bickerstaff.

After the election of the third Thatcher government in 1987, Bickerstaff moved to set up the groundwork for a statutory minimum wage to form part of the next Labour Party manifesto.  With the help of a social policy think tank, the Low Pay Unit (LPU), he convened a working group of union activists, parliamentarians and academics to explore the feasibility of a national minimum.  In quick time, the group, known as the Low Pay Forum, produced a report, published by the LPU in 1988, under the title Britain Can’t Afford Low Pay: The Case for a Statutory Minimum Wage.  Drafted in the style of a green paper, the report made the case for a minimum wage set initially at 50% of average earnings and rising to two thirds over the course of the next Parliament. The legal minimum would operate as a floor for sectoral collective bargaining and would itself be underpinned by unemployment benefits with a high wage-replacement ratio.  Statutory uprating, as in the French scheme, would ensure that the legal minimum kept pace with both wages and prices.

Much of the economic policy input for the Low Pay Forum was provided by researchers at the Department of Applied Economics, including Frank Wilkinson.  Frank had been a co-author of the DAE report on wages councils.  With the support of the Forum’s wider membership of activists and researchers, Frank and Rodney made the argument to the Labour leadership that a minimum wage would be the best way to restore fairness in the labour market, while also breaking the cycle of low productivity and under-performance in the British economy.

The Labour Party entered the 1992 general election with a manifesto commitment to introducing a statutory minimum at half average earnings and rising to two thirds over the lifetime of the next Parliament, much as set out in the Low Pay Forum report. This, however, was not to be.  After Labour lost the 1992 election, the commitment to fix the minimum wage as a proportion of average earnings and to increase it over time with wages and prices was dropped. When the time came to enact the NMW, it was a more orthodox thinking which informed the new legislation, with the Low Pay Commission being tasked with setting a minimum wage rate which would not over-burden business.

Worse was to come for the Cambridge school. The wider economics profession was now moving in the direction of abstract modelling coupled with an inherent suspicion of regulation.  Cambridge was not immune from the neoliberal consensus taking hold in economics departments across the world, In 2004 the DAE was closed, ostensibly on the grounds that its research was of diminishing relevance.  In truth, it was the idea of a realistic and public-facing economics itself which had somehow fallen into disrepute.

This was undoubtedly a defeat for progressive policy making. But in the longer term, the story of the Cambridge school and the economic case for the minimum wage is one of ‘failing to succeed’: initial defeat has been followed by eventual success.  The model of the NMW put in place in the late 1990s has not endured. Faced with the rising cost of tax credits, an unsustainable subsidy to low paying employers as pointed out by the Low Pay Forum as long ago as 1988, it was a Conservative government which in 2016 introduced a new statutory national living wage rate, ignoring the Low Pay Commission in the process. Fears that this higher minimum wage rate would lead to unemployment have proved unfounded.

The UK still lacks an NMW that provides a living income along French lines, but the argument that a high minimum wage meets a range of social and economic objectives has won out over alternatives, influencing the global living wage movement and measures such as the EU’s new directive on a framework for adequate minimum wages in Europe.  In the meantime, the economics of the Cambridge school is making a comeback.  The lesson of the minimum wage is that when activists and researchers combine their efforts, long-term policy impacts can result.

For those who are interested in a longer-form treatment of the arguments set out in this blog, please see: Simon Deakin, Failing to Succeed? The Cambridge School and the Economic Case for the Minimum Wage, 38 International Journal of Comparative Labour Law and Industrial Relations 211 (2022)