What is minimum wage in uk?

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What is minimum wage in UK?

In UK, a minimum wage is least hourly, weekly or monthly wage which pay by employers to employees or workers.

The Main Aim of the Minimum Wage:

  1. Labour market Bias: The Minimum wage is a tool intended to offset some of the effect of determined bias of many low -paid females employees and younger employees.
  2. Labour market incentives: The minimum wage is intended to improve the incentives for people to start looking for work- so boosting the economy's available Labour Supply.
  3. The Equity Justification: Different jobs should offer a fair rate of pay commensurate with the experience and the ability of a worker or an employee.

How does minimum wage work?

The minimum wage is a price floor. Employers cannot officially cut down the current minimum wage rate per hour. That are applies for both fulltime and part time employees.

Labour Supply and Demand Curve analysis can be used to show the effects.

We can see from the diagram the possible effects of a minimum wage. Where demand equal to supply, Minimum wage behaves as a price floor on labour, this equilibrium wage for this particular labour market is at W1.the minimum wage is set at Wmin, there will be an excess supply of labour equal to E3-E2 because the supply of labour will expand for which employees will be willing and capable to offer themselves for work at the higher wage than before, but there is a risk that the demand for employees from employers will contract if the minimum wage is introduced.

Argument in favour of Minimum Wage in UK:

  • Motivates and encourage workers to work harder.
  • Standard of living of poorest and weak class people are increases in society.
  • Inflation: There have been negligible adverse effects on wage and price inflation. Other factors affecting inflationary pressure have been broadly favourable for the UK in recent years. In many sectors firms find it hard to pass on higher wage costs to final consumers again limiting the inflationary effect of the minimum wage.
  • Wage Costs: The minimum wage affects only a small proportion of workers and the effects on the wage bills of most business is not a significant factor in their employment decisions. In the short terms, the demand for labour tends to be inelastic with respect to changes in wages
  • Production: It is hard to recognise any strong positive effect on labour production. but production gains have been made in most low paying industries, a trend which started before the minimum wage was introduced.
  • Discrimination: The minimum wage has had a significant impact on the earnings of part time female workers.
  • Can a minimum wage actually increase employment?

Answer is depends on the situation in the labour market when a pay floor is introduced. There are two main explanations for the possibility of higher employment.

  • The Keynesian Argument that higher wages rates will increase the real disposable income of lower paid employees many of whom have a high marginal tendency to consume. So, they will increase their own spending and this will supply through the circular flow of income and spending.
  • The efficiency wage argument that raising pay levels for low paid workers may have a positive effect on their productivity and efficiency. For psychological benefits of being paid more, business may take steps to get better production processes, workplace training if they know they must pay at least the constitutional pay floor.
  • Exactly Keynesian argument: Keynes maintained the cause of recessions/depression was a drop in aggregate demand (The sum of all expenditure in the economy over a period of time). Fewer people buying issue that factories and businesses scale their production cut workers who then scale back their personal consumption while they try to find new work. so they exists a productivity gap between what can be produced and what is being produced, and a stimulus is the governments way of closing that gap-by temporary paying for those things that people are no longer buying which should lead to people being hired back to work .

The importance of Elasticity of Demand and Supply of Labour:

The impact of minimum wage on employment levels depends in part on the elasticity of demand and elasticity of supply of labour in different industries. If labour demand is relatively inelastic then the in reduction in employment is likely to be less severe than if employers' demand for labour is elastic with respect to changes in the wage level. Elasticity refers to how supply and demand respond to various factors, including price as well as other stochastic principles.

Below Diagram we can see the possible effects of a minimum wage when both labour demand and labour supply are elastics in response to a change in the market wage rate. The excess supply created is much higher than in the previous diagram.

Argument against the minimum wage in UK:

The Rev. D. James A. Forbes Jr.: A Just Minimum Wage, “Poverty is one of silent killers in the life of our nation. Its cumulative effect is as devastating as earth quakes, floods, fires and hurricanes. More people die each year from poverty-related causes than the combined casualties from war, natural disasters and homicide… The impact of poverty is a weapon of mass destruction in our midst.(1)”

  • Effect on relative poverty: is the minimum wage the most effective policy to reduce relative poverty? There is evidence that it tends to boost the incomes of middle-income households where more than one household member is already in work whereas the greatest risk of relative poverty is among the unemployed, elderly and single parent families where the parent is not employed.
  • That's more affect on the small business in compare to large business. because ,small business has not enough revenue to pay their workers at initial stage.
  • The company or employers cannot provide fully training to their employees, because of they have to pay minimum wage at the primary period.
  • Because of minimum wage, company or employers will cut down the number of hours worked by individually or they may be reducing the number of workers.
  • Lower labour costs are one of the key factors in attracting investors because the property Right,Infrastructure,Regulation,Relation with administration and the other indicators that influence the size of investment have rather negative effect.
  • Minimum wage is harmful for low production workers, for young people who wish to start working and, in fact, for the weakest social groups. Such persons would be hired hardly and it becomes even harder with the higher minimum wage size. Thus, they cannot become achieve skills, which can be useful to increase their efficiency and be more competitive on the labor market.
  • Share of workers receiving minimum wage in the public sector is small but its increase would cause extra budget costs. This money is taken from the private sector where they could be used more efficiently and to include more value. So, the loss for the society would be greater.