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What justification isthere for the introduction of the National Minimum Wage?

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Usamah Chaudhary Paper 4, Topic 4 26th November 2004 Magdalene College What justification is there for the introduction of the National Minimum Wage? The concept of a National Minimum Wage (NMW) was first introduced in the political arena by the Labour Party in their election manifesto in 1992, with the first comprehensive NMW being introduced in April 1999 at 3.60 per hour for workers over the age of 21. The Conservative Party has subsequently endorsed the NMW and thus the NMW has not been a source of major political dispute; however, it is still worth considering the initial justification for the introduction of the NMW in the light of British experience. This analysis will consider arguments specific to the British economy at the time rather than the general benefits of a minimum wage. The first major factor is that of earnings inequality. This widened persistently over the 1980s and 90s, mostly due to a rise in the gap between the top and the median of the earnings distribution as well between the median and the bottom of the earning distribution. Wider wage differentials led to greater inequality in income distribution; in 1995, the highest-paid 10 percent of employees in a profession were, on average, earning up to 3.6 times as much as the lowest-paid 10 percent of employees in the same profession. ...read more.


On the other hand, increased wages may well result in increased work effort on the part of the employee; thus it is true that in the long run a minimum wage will shift labour to more efficient operations. A fourth point to note is that some form of regulation was crucial in the UK to prevent 'sweating' (whereby workers are paid below subsistence levels) and other forms of worker exploitation. Although it may be argued that workers were left open to such exploitation only when Wages Councils were abolished by the Major government in 1993, the truth is that Wages Councils were never as effective as they should have been anyway. Besides consistently setting too low rates of pay, Wages Councils were not universal in impact, setting minimum rates only for specific industries where low pay dominated and leaving out industries where some form of collective bargaining, however ineffective, existed. This did nothing for low-paid workers and firms that could not participate in collective bargaining due to poor bargaining structures in the excluded industries; it also excluded smaller industries where low pay was known to exist. In addition, union collective bargaining was often ineffective and by the 1980s it was evident that collective bargaining alone could not resolve the problem of low pay. Coupled with this was the policy of labour market deregulation pursued by the Conservative governments throughout the 80s and early 90s. ...read more.


The government may have felt that setting a minimum wage would shift the burden of maintaining minimum income levels off itself (albeit onto employers' pay bill). The NMW thus underpinned the benefits system by setting a minimum level of income; this, in turn, led to increased tax revenue for the government. Another reason for implementing a minimum wage is that it reduces the burden of unemployment benefit on the government. Assuming marginal tax rates for low-paid workers aren't too high, a higher guaranteed minimum level of pay would create incentives for workers to join the labour force, resulting in less people claiming unemployment benefits. In addition, more workers would offer their labour and thus the cost of recruitment, especially for high labour turnover low-paying jobs, would decrease. Thus further justification for the NMW is the reduction of the financial burden on the government through increased participation in the labour market, increased tax revenues and less expenditure on in-work benefits. Thus the NMW was justified on a number of points, ranging from the protection of low paid workers to reducing income inequality to increasing work incentives in the economy. Given the numerous benefits arising from the NMW's introduction and the fact that thus far there have not been any significant knock-on effects on pay differentials or employment, one may conclude that the introduction of the National Minimum Wage was entirely justified. ?? ?? ?? ?? 1 ...read more.

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