THE Commerce and Employment Department intends to bring minimum wage legislation before the States by the end of this year. Most developed countries have already enacted such legislation and indeed Guernsey is the only part of the British Isles that has not yet introduced it.

The UK successfully brought in a minimum wage in April 1999 that now stands at £5.05 per hour for adults, whilst Jersey has an hourly rate of £5.24, a slight increase on its introductory figure in April 2005.

A minimum wage will form part of Guernsey’s anti-poverty strategy and will offer protection for low-paid workers, particularly those in the agricultural, hospitality and retail industries, who do not fully share in the island’s prosperity.

There will be rates for adults and youths, regular reviews to keep pace with inflation and an emphasis on tailoring it to the island’s specific circumstances.

When the UK introduced the minimum wage, its opponents claimed it would undermine the very labour market flexibility that had driven the economy and would lead to unemployment and higher poverty.

Conversely, its supporters argued it would reduce poverty and either have no impact on employment or actually increase it.

The evidence from the UK, US and other countries is indeterminate, but it does seem that a modest minimum wage has had few adverse effects and that unemployment has continued to fall or stabilise, although the latter may be more a corollary of strong economic growth.

The low-paid have benefited from a rise in their living standards and more people have been encouraged to enter the labour market, but it is important that the minimum wage is not set too high.

Governments tend to have two major objectives when they intervene in the economy: social efficiency and equity, and it is the latter that persuades them to introduce minimum wage legislation.

The free market often fails to create a fair distribution of resources, leading to the need for legal protection for the poor.

The problems come when assessing the subjective issues of fairness and relative poverty and the consequences for the economy and business.

In theory, a minimum wage should lead to higher costs and unemployment because an increase in wages above the market-clearing rate will cause an increase in the supply of labour and a fall in the demand for it.

The unemployment problem will be exacerbated because the price elasticity of demand for low-skilled labour tends to be very sensitive since the final product or service it provides will also generally have a high price elasticity of demand.

If wages rise, firms will need to increase their prices to maintain their profits, but this may not be possible in a competitive environment.

Either way, output and employment will fall because firms will produce less if they are unable to charge more and consumers will demand less if prices go up.

However, this will hold true only if only one firm faces an increase in its wages and decides to raise its prices to compensate, while others hold their prices because their labour costs have not risen.

A minimum wage will affect the labour costs of all businesses in the same industry and should not therefore benefit one business over another, unless the competition is foreign and similar legislation does not apply or they enjoy lower cost structures, or the competition uses proportionately more capital than labour.

Local industries such as agriculture, horticulture and retail will find it harder to thrive with a minimum wage because they do face foreign rivals that have lower cost structures and an increase in wages will make it harder for them to compete.

Similarly, the local hospitality industry does not face direct foreign competition, but visitors may be more reluctant to come here if they find that the price of going out in Guernsey is more expensive than in other places.

A minimum wage may undermine our competitiveness in these industries and lead to a fall in output and employment.

Companies that do not have any pricing power will suffer, but the rise in labour costs and fall in profits may encourage them to become more efficient or to withdraw from the market.

Of course, local businesses might reduce their number of employees and cause unemployment, but they could also try to improve their productivity or cut their usage of other factors of production.

Higher wages may encourage staff to be more productive and reduce labour turnover.

A minimum wage will increase the cost of labour and could therefore undermine it, if those companies that cannot pay higher wages respond by reducing staff, or they collapse.

This seems unsound when the island’s future tax revenue will depend on the taxation of employment, but it may actually encourage islanders to become more skilled in the long run and therefore to find work that pays better wages and generates higher tax revenues.

Equally, the island currently has full employment and people might simply find a job in another sector of the economy, although this is predicated on their occupational mobility or the availability of other low-skilled jobs that have not been damaged by a minimum wage.

Alternatively, if employers do not reduce staff a minimum wage should itself lead to higher income tax revenues.

The experience of other countries suggests that a modest minimum wage does not have any adverse impact on unemployment.

It does provide a more equitable distribution of income and increases the consumption of the low-paid.

Local industries such as agriculture, horticulture and hospitality will be affected because they face strong foreign competition, so the key issue is to balance properly the interests of these companies and their employees and not to set the minimum wage too high.

In the long run the island would benefit financially from fewer low-paid jobs, but this transition will take decades and will require more than minimum wage legislation.

Not all people are able to take on skilled employment and the island will always need some services that do not offer high rates of pay.

* Comments to rich@hemans. net. Richard Hemans is a chartered accountant who works on a freelance basis.