The National Minimum Wage Economics Essay

Published: Last Edited:

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

The national minimum wage was introduced in 1999 when the number of low paid workers was accelerating, in some sectors pay was as low as £2 an hour, since the early eighties employers had been driving wages down, especially unskilled jobs. There was an increase in part time working, with wages lower than equivalent full time posts. (Sloman & Wilde, 2009).Britain is currently in the grip of an economic downturn, unemployment has increased, young people have been particularly affected by unemployment and there has been a slump in demand in the economy. This essay will consider whether lowering the UKs statutory minimum wage would reduce unemployment and get Britain working again. It will look at whether evidence links employment levels and minimum wages and other countries experiences which have no minimum wage. It will also consider other variables such as youth unemployment, immigration and the use of prisoners with regards to the minimum wage. It will also consider the neoclassical effect of minimum wages on employment levels.

In its 2012 annual report, the low pay commission found that groups of workers on the minimum wage have not been as badly hit during the recession, the number of jobs in this sector has increased compared to falls in the overall economy. However, they also found that young people without any qualifications are still having difficulties getting jobs; some of the research commissioned for the report showed that, although wage differentials had narrowed, productivity differences had widened. This implies that wage increases for the young did not increase productivity in this group. The commission found no evidence of an adverse impact on employment due to the minimum wage, although non correlated evidence suggests a negative impact on hours. (Low pay commission, 2012).

Youth unemployment increased from 575000 in 2004 to 1,016000 in 2011, over the same period the number of workers from newly joined members of the EU increased by 600000. (BBC NEWS. 2012). Despite these figures (Gregg & Wadsworth,2011) analysis showed no correlation between youth unemployment and the migration rate, this was despite a report by the TUC in 2008 that migrant workers, were twice as likely as other workers to receive less than the minimum wage.(HR Magazine, 2008)

The low pay commission has suggested that firms are more hesitant about recruiting inexperienced staff because of the increased wage bill, Young, unskilled workers become less attractive to employers when the wage bill rises.(The Telegraph, 2011). Minimum wage rates increased in Oct 2012 for adults over 21, increased from £6.08 to £6.19. However there was no increase for 18-20 year olds, which remains at £4.98 and under 18, it remains at £3.68.).Youth Unemployment (16-24) now stands at 1.02 million or 21.6 %.( ONS. Gov, 2012).

During the current recession, real wage costs have fallen due to pay freezes and inflation. During a period of low wage growth, any increase in the minimum wage raises the comparative cost of low paid workers. Firms are unlikely to be capable of absorbing these extra costs. During a downturn, the minimum wage may be an obstacle to firms wishing to recruit more workers, as the minimum wage obliges them to pay more than they otherwise would. (Institute for Social and Economic Research, 2012). The increase in minimum wage that occurs annually is said to be actually falling in real terms due to the increase in costs of living not being equal. The combination of falling wages, tax rises and reductions in tax credits are overall making people poorer. (Guardian, 2012). The BCC (British Chamber of Commerce), expressed disappointment with the increase in the adult rate, declaring it adds significant costs to business and encourages wage inflation, especially at higher levels. The freeze on youth rates have been more positively received, as in the light of high youth employment, employers will be less deterred from hiring young people. (Xpert HR, 2012). The use of prisoners for low paid jobs is now also seen as a real threat to the young and less skilled, some prisoners are being paid £3 per day to work in one particular call centre, replacing previous staff that were fired (Guardian, 2012). Around 15% of the call centres staff are prisoners on day release

A retrospective study of the effects of the minimum wage (Dolton et al, fiscal studies 2010) was undertaken in 2009. Their data covers the period 1997-2007, which looked at the medium run effects of the minimum wage, previous studies concentrated on short run effects which found little adverse effect on employment. Their findings were consistent with the short term effects; no impact on employment, this study was completed before the 2008 downturn.

Another study of the effects of adjusting the minimum wage can be shown from the results of an experiment testing the increase of national minimum wage in New Jersey (Card & Krueger, 1994). This showed an increase of 2.75 workers, although its reliability is doubted due to the volume and sector sampled. Therefore, if in the UK a similar experiment was implemented where the minimum wage rates were lowered, it is important to ensure that it is a true representation, and that there are no other contributing factors that could affect the results.

Ireland attempted to cut its minimum wage by 12 per cent as part of a four year plan to attempt to 'remove barriers to employment creation' in the hope of improving the damaged economy and the a 19 per cent fall in gross national product (People Management, 2010). Effective from February 2011, the change, although thought to be overall beneficial for the economy generated many dispute's as employees refused to sign new contracts resulting in protests, Britain and Ireland's largest trade union Unite condemned the reduction (, 2010) followed by IMPACT (public sector workers union) who also attacked the cuts. However, the Irish Small and Medium Enterprises Association, maintained that the cut would enable firms to save jobs due to the lower labour costs. The EU Commissioner for Economic and Monetary Affairs welcomed and agreed with a reduction in the minimum wage (Europa, 2010) cutting the minimum wage was a very unpopular move and the cut was reversed after a few months with the election of a new government.

Germany has no national minimum wage; unemployment has decreased despite the recession, despite this the average German is getting poorer, people in the unskilled sectors are particularly low paid, rely on short term contracts that never lead to permanent employment, thus denying them employment rights afforded to permanent staff resulting in poor job security, many workers are working for less than it costs to survive, they rely on government subsidies to live. Rates of pay for temporary workers are lower than the equivalent permanent post. Business argue that paying a minimum wage will reduce employment, but where there are local minimum wage agreements, it has not led to increased job losses, (The Guardian, 2012)

Prior to the increase in minimum wage 2012, a retailer survey (BIRA), favoured a freeze. It found, 61% of members froze employees pay in 2012, the average rise, when give was 2.5%, employees hours were reduced by 28% of employers and 10% made redundancies.67% of retail members indicated that their profits had been affected by the minimum wage, this was an increase from 43% in a 2010 survey, members in the 3 to 10 million turnover were affected more.42% have reduced the number of staff to mitigate the effects of the minimum wage. BIRA argues the minimum wage should be understood against closing shops and deteriorating retail sales, they argue that it is working in contradiction of job creation within the sector. Incentives to employ younger staff are reduced as the gap between rates narrows as more experienced staff offer better value. (BIRA, British Independent Retailers Association, 2012).

A national minimum wage freeze for younger workers was also suggested in the beginning of 2010 by the Charted Institute of Personnel and Development (CIPD, 2010) as this was necessary to ensure employers had an incentive to recruit young people. They also believed that young people in work should play a part in maximising opportunities for those that were not. (CIPD, 2010)

Despite the implementation of a minimum wage, Many employers are now adopting the concept of a "living wage" (People Management, 2011), this means that low-paid workers are receiving a pay rise in order to ensure that they can fund an acceptable standard of living; a report (The Observer, 2012) suggests that the middle class is in danger as people are not able to look beyond payday, traditional well-paid jobs for this group have given way to low skilled, low paid jobs, this group of people will continue to see real declines in their income and living standards. Improving skills and training for those who are at the lower end of the workforce and boosting wages for the lowest paid, would have a more positive effect on employment.

From an economic perspective, the effect of introducing a minimum wage is shown

Figure 1.

(King David N, 2011)

When there is no minimum wage, the actual wage is set at Wo, where the initial demand and supply curve meet So and Do. Qo are the number of workers hired initially. When a minimum wage is set, the effect will depend on where it is set, If it is set below the Wo level, it will have no effect on the supply of labour, however if the minimum wage is set above Wo at W1, then the willingness to supply labour will increase, as shown in Q2 on the So supply curve. The higher the minimum wage results in a greater willingness to work, but the demand for labour decreases. The figure shows that an increase in minimum wage has an adverse effect on employment. However the level of employment is affected by many additional influences, the economy, labour substitution, hours worked, and more productive workers. (King, David, 2011)

There are contradictory viewpoints as to whether lowering the minimum wage would help unemployment. Official studies point conclude very little impact on employment levels since the implementation of the minimum wage. On the other hand many employers and organisations believe the minimum wage is a barrier to creating jobs, particularly for young people. The neoclassical model suggests reducing or getting rid of the minimum wage should reduce unemployment, this model is weakened by lack of taking any other factors into consideration, which is necessary in a fluid labour market. The lack of a minimum wage in Germany has led to hardship and inequality between permanent and short term contract employees. The state has to subsidise the low paid just to survive, employers are leaning on the state to top up wages. If the UK were to adopt similar practises, employment may increase but it could turn out very costly for the country. Overall it may appear that lowering the national minimum wage may not be the most effective way to solving the unemployment within the UK. Specifically the youth unemployment appears to be due to many factors such as lack of skill and education, therefore reducing their minimum wage would surely demotivate a high majority, prolonging their unemployment and affecting their future careers. As seen from the Ireland cuts, due to the effects being slow, if anything it caused a lot of controversy and did not solve the situation so was therefore aborted. This suggests that if the UK was to take the same approach it would also fail and not achieve the desired affects. Even if the minimum wage is lowered in the interests of lower costs of labour, and to encourage companies to employ more staff, companies may still look for cheaper labour alternatives, such as immigrants and prisoners as mentioned, further continuing the competitive jobs market and maintaining current unemployment levels.