Why does Britain need a Minimum wage

Why does Britain need a Minimum wage? Should its real value be subject to review?

Introduction

The Minimum Wage was introduced into the UK in April 1999 at a rate of £3.60 an hour. The current rate is £3.80ph for 18-21 year olds and £4.50 for workers aged 22 and over.10 This essay seeks to explore the issues leading to the introduction of a Minimum Wage by the Government, and then to asses the impacts of the value it is set at. I will then conclude as to whether Britain should have a minimum wage and if its real value should be reviewed.

The introduction of a Minimum wage interferes with the free market (above). It can cause supply and demand not to be equal. The diagram below shows the case where the minimum wage is set above equilibrium. The result is unemployment.

The graph above shows the impact of the Minimum Wage on the total employment. The equilibrium employment is at point E1 where the wage rate is W0. When the Minimum Wage is imposed at point W1, total employment falls to point E2.

Why Britain needs a Minimum wage

Bridging the gap between the rich and the poor: Introducing a Minimum Wage so that low paid workers would not earn too little or less than a specified amount to meet their basic needs and allow them to be relatively better off than before the minimum wage rate was introduced.

Preventing Employee Exploitation: Employers could exploit workers by paying them far less than they are worth, while making very high profits without restriction.

Improving General Welfare: If the minimum wage goes up, then workers in the economy may have more disposable income.

To reduce pay differentials between male and female workers: Minimum wage may force employers to pay everyone a specific wage rate instead of whatever suits them.5

This graph shows that there are still pay differentials between what men and women are earning annually. source: tutor2.net

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Preventing Employee Exploitation: Employers could exploit workers by paying them far less than they are worth, while making very high profits without restriction.

Improving General Welfare: If the minimum wage goes up, then workers in the economy may have more disposable income.

To reduce pay differentials between male and female workers: Minimum wage may force employers to pay everyone a specific wage rate instead of whatever suits them.5

This graph shows that there are still pay differentials between what men and women are earning annually. source: tutor2.net

Induce more people to work: Increased supply of labour due to more incentive to work and therefore less dependency on benefits, thus reducing the poverty trap effect.8

To increase productivity of workers: Higher paid workers tend to be more productive.2

Reduce labour turnover: In low paid jobs, rapid labour turnover can be expensive for employers.

Possible negative impacts on the Economy

Indirect increase in Unemployment: Fewer employers would be willing to pay more workers a higher rate, leading to a disequilibrium (see diagram 2)

Cost Push Inflation: To cope with this increase in their cost of production, some firms may pass this higher wage rate to the prices of their goods leading to inflation.

Loss of Investment: Multinational Companies may decide not to source production in the UK if they feel the wage rate is uncompetitive compared to other countries.

Relative increase in general earnings: Other workers who are earning more will still demand higher wages to maintain pay differentials.6

Regional differences: A Minimum Wage does not take into account regional differences in cost of living and may have a distortionary effect on the way the UK labour market works.3

Real Impact on the Labour Market: The impact of a minimum wage on employment levels depends on the elasticity of demand and elasticity of supply of labour in different industries. If labour demand is relatively inelastic then the contraction in employment is likely to be less severe than if employers' demand for labour is elastic with respect to changes in the wage level.

The impacts will be larger for more labour intensive industries such as hotels and catering and this should be taken into account when deciding the real value:

There are different views concerning the effects of having a minimum wage in the UK. Some economists say that the Minimum Wage is low and therefore should not have a significant negative impact on the economy.8 Some other economists argue that the effects of Minimum Wage will be felt deeply in certain sectors of the economy such as hospitality and catering which are particularly labour intensive, and it could have varying effects in certain parts of the country like the North and Southwest.3

Most economic theories support the argument that imposing a minimum price for anything will in general; reduce the quantity that is traded, therefore imposing a Minimum Wage will reduce the total number of people in employment.15

However, studies of the impact of a Minimum Wage on the American economy by David Card and Alan B. Krueger1 shows that it had little or no effect at all. The number of job losses related to the minimum wage was largely insignificant and there was a very slight increase in employment in 1996 after the minimum wage was increased. Their findings challenge the conventional view that higher minimum wages reduce jobs for low-wage workers, though I remain sceptical until more research is published.

The Minimum Wage in Other Countries

Many other countries also have a minimum wage. A comparison is shown:

Source: Low Pay Commission country comparison 10

This shows that the Minimum Wage of £4.10 in the UK is not too high or too low. It is quite competitive when compared with other countries.

Conclusion

As the cost of living and wages in general rise, the minimum wage should increase in order to give an incentive to stay in employment rather than living off benefits. The evidence suggests the level at which the Minimum Wage has been set so far has not caused any damage to the economy, probably because it had been set below the equilibrium wage rate. However, economists warn that a continuous hike in the minimum wage would eventually lead to an excess of labour supply over demand, causing unemployment.3 I conclude the real value should be subject to review over time, the evidence suggests current the annual review is effective in moving the rate to the optimal level, which helps as many low-paid workers as possible without having a negative impact on the economy.7

Analysing at the effects of the current rate and the comparison with other countries I conclude the real value at the moment is a desirable level and should not be drastically changed.