In the 20 years before the introduction of the National Minimum Wage there was an increase in the inequality of earnings in the UK. The reasons being that those earning median wages and those whose hourly rates fell within the top 10 percent (the highest decile) had a greater increase in their earnings than those in the lowest decile. This led to in-work poverty and increased dependence on social security benefits in order to supplement low wages (Low Pay Commission 1998). If the National Minimum Wage remains at a constant rate then the chasm between the rich and the poor will continue to grow. The reason for this is that pay increases are normally based on percentages of earnings, meaning that the higher paid will always receive a greater amount of money even if everyone was given a 5 percent pay increase. If the concept of a minimum wage which could increase more regularly was introduced then this may help to correct this imbalance.
A major problem caused by minimum wage legislation may be that of involuntary unemployment amongst lower paid workers, therefore harming those it aims to assist. Minimum wage needs to be set at a level where there can be free market equilibrium (i.e. where demand for workers, meets the supply of available and willing workers). If minimum wage is set lower than this equilibrium then there will be an excess labour demand as businesses will want to recruit workers as it will cost them less. However as there are plenty of jobs available, workers are likely to only work for those businesses offering the highest wage, hence the minimum wage will gradually be pushed back up to equilibrium. Alternatively if the minimum wage is set above the free market equilibrium wage, then there will be an excess labour supply because businesses are less willing to employ workers at this rate. This will therefore lead to involuntary unemployment. “Workers are involuntary unemployed if they are prepared to work at the going wage rate but cannot find jobs” (Begg et al 2000). Although the Low pay commission claimed soon after introducing the minimum wage in 1999 that there had been no measurable impact on overall employment, the minimum wage was introduced during a boom time for the economy when there were plenty of jobs available and both manufacturing and service industries were doing well and feeling confident about the future. Then speculation that a minimum wage might lead to job losses proved to be unfounded. However this can only be really judged properly over a full UK business cycle because recessions as well as booms need to be taken into account.
At present, the outlook for the economy isn’t promising, there are fewer jobs around as evidenced by a steep decline in the size of recruitment sections in national newspapers. The manufacturing industry is having a tough time and surveys indicate that businesses are generally more pessimistic about the prospects than at any time in the last five years. (Mori 2002). The Chancellor Gordon Brown also put out the same message in his pre budget speech earlier this week. It will therefore be interesting to see what effect the minimum wage will have when the economy is in decline. It may mean that companies will be less willing to take on new staff and will also be more ready to lay off existing staff because their wage bill is now much higher.
Before the introduction of the National Minimum Wage, low pay was prevalent among young people encouraging them to stay in education or training. This was beneficial to the country, as it should have led to a better educated and more highly skilled workforce. However although the minimum wage aims to assist young people, it may encourage more 18 year olds to enter employment which may not be best for the UK workforce or for them as individuals, as training would improve their ability to command higher pay. Fortunately the minimum wage does not yet apply to 16 and 17 year olds, as this would cause possible damage to their future employment prospects by encouraging them to enter the labour market without necessary education and training.
Inflationary pressure caused by the National Minimum Wage may also be a problem for individuals assisted by the minimum wage. In many jobs there is a pressure to maintain pay differentials one example of this is in the health service. Doctors feel that the job they do is more important than that of nurses and so they expect to be paid more. This means that offering minimum wage to the lower paid members of staff may cause upset amongst higher paid members of staff who feel they also deserve a pay rise. If they are also given a pay rise then this will not only cause possible problems for the cost structure of businesses but it may also lead to cost push inflation. If business costs are rising then a natural response is to raise the prices for their products or services, therefore meaning that the people the minimum wage aims to protect i.e. those groups in the low pay sector are no better off than they were previously.
The minimum wage may cause some difficulties for those it aims to assist by increasing involuntary unemployment and possible inflation. However the employment situation has been recently compounded by a raft of additional legislation including increased national insurance payments, longer maternity and paternity leave, holiday entitlement for part time workers and other factors which together make each employee more costly to employ. Because of all these factors it might be impossible to identify the minimum wage as the main culprit behind job losses and it might only be possible to view it as a contributing factor. It does also help to prevent exploitation of workers in the lowest paying business sectors and certain groups of individuals most likely to be affected by low pay. Statistics found by the Low Pay Commission (1998) showed that on one estate “63% of unemployed people had refused jobs because they claimed that the pay was so low that they were better off on benefits”. Although this is voluntary unemployment as opposed to involuntary employment, it is still evidence that the minimum wage does more to assist than it does to harm. Furthermore the number of young people leaving education and training should be kept to a minimum by the introduction of a development rate. This is lower than minimum wage and not only will it be less attractive to young workers but it should encourage employers to train their workers, as workers aged 21 and over are eligible for this rate whilst being trained in the first 6 months of a new job. Restoring pay differentials may cause problems for the economy and indirectly for those the minimum wage aims to assist, however this will vary considerably between businesses and as long as minimum wage is not set at too high a rate then this effect should only be very small. Therefore as long as minimum wage is kept at a sensible rate where there is free market equilibrium (thus keeping involuntary unemployment to a minimum), it benefits a number of workers and helps to prevent the worst cases of exploitation in the workforce, doing more good than it does harm.
