Ed's soundbite could leave a lasting scar

ED MILLIBAND’S announcement that a Labour government would revise the current minimum wage runs the risk of being a soundbite that leaves a nasty scar.

The Labour leader did not give details about the exact figure his party would set for a new minimum wage; however, he did say that it would be linked to “average earnings”.

Speaking to party activists in the West Midlands Mr Milliband said: "The minimum wage will rise by more than average earnings in the economy as a whole as part of a five-year ambition to restore the link between doing a hard day's work and building a decent life for your family."

According to statistics produced by the OECD based on Purchasing Power Parity, when the price levels between countries is expressed in a common currency, the United Kingdom ranks below France, Australia and Ireland in terms of minimum wage.

Mr Milliband’s statement comes as voters in Switzerland rejected calls to raise the national minimum wage to approximately £15 per hour, which would have made it the highest in the world, amid claims that it would drive up production costs and increase unemployment,

While British Prime Minister David Cameron and Liberal Democrat leader Nick Clegg have also stated that they would look at raising that minimum wage, should they be elected in the 2015 general election, business leaders have expressed concerns about its impact on the economy as a whole.

Based upon economic models rise in minimum wages above the equilibrium level determined by markets could lead to an increase in unemployment and living costs. As the minimum wage rises above the level at which it becomes competitive for firms to produce goods then it seems almost certain that companies will look to recoup the additional costs through layoffs according to sceptics.

The same arguments were proposed when the minimum wage was first introduced with little effect on the labour market. Opponents of the move have claimed that this is because the wage at the time was lower than the level of equilibrium for markets, whereas proposals to raise the minimum wage now could lead to this being pushed up.

What seems more likely, however, is that an increase in the minimum wage would lead to equivalent rises in production costs across the board. Thereby absorbing the extra costs for most companies, while negating the purpose of the rise as living costs increase overall.

If Mr Milliband is serious about creating a minimum wage rising by more than average earnings then he must be careful to ensure that the relevant apparatus is implemented to ensure that it does not lead to an increase in inflation and negate any benefit it may have had.