The government should raise the minimum wage from £6.50 to the current living wage
of £7.65. Discuss.
The National Minimum Wage (NMW) is the minimum pay per hour all workers are entitled to by law.
It was first introduced in 1999 and between then and 2006 it increased at a rate higher than the
average increase in wages. However, since 2007, the minimum wage has been decreasing in real
terms because CPI inflation has been higher than increases to the NMW. This has meant that there
has been a squeeze on pay for the 1 million workers covered by the NMW, roughly 5% of the total
workforce. There is much debate as to whether the NMW should be raised to the current ‘living
wage’ of £7.65. Despite its frequent application (most developed countries and many developing
countries have some sort of minimum wage regulation), it remains one of the most contentious
policy measures. On the one hand, it is argued that it helps reduce poverty, ensures that workers
have a minimum acceptable standard of living and that they are not exploited by unscrupulous
employers. On the other hand, the minimum wage is seen as causing unemployment and promoting
‘migration’ of jobs to cheaper countries. Boris Johnson argues that ‘it is morally right’ for low-paid
workers to receive a ‘living wage’. While the moral case is easy to appreciate, does increasing the
NMW actually make economic sense?
Fig 1
The biggest criticism of raising (and even having) the minimum wage is the argument that it will have
a detrimental impact on employment. This can be seen in Fig 1 which represents a perfectly
competitive labour market with an effective minimum wage set above the market equilibrium at
Wm. In theory, this would reduce the demand for labour (Q1 to Q2) and hence cause lower output
and in turn cause unemployment equal to Q2Q3. Demand for labour would fall because firms would
substitute in capital instead of employing labour at a higher price. Theoretically, a higher NMW will
raise the costs of production and thus is also likely to raise the price of final products, reducing
demand for final goods and further causing unemployment. Moreover, the loss of jobs is likely to be
concentrated on the unskilled workers who are easier to substitute for capital, or whose job can be
done by someone abroad at a lower wage. Therefore, the main criticism of raising the NMW is that
rather than doing any good, it will just cause unemployment among the unskilled poor, the exact
group the policy is designed to help.
However, reports have consistently concluded that there is little evidence of any adverse impact on
employment of low-paid workers following a modest raise in the minimum wage. Indeed, a study in
America followed the employment figures of fast-food chains in two states, one which raised the
minimum wage and one which didn’t, and found no evidence of it affecting employment levels. In
the same vein, in Nevada, where the national minimum of $7.25 an hour applies, the jobless rate is
10.2%. In Vermont, where the minimum wage is $8.60 an hour, the unemployment rate is 5.1%. The
evidence is conclusive; there is no clear correlation between modest raises in the minimum wage
and the rate of unemployment.
of £7.65. Discuss.
The National Minimum Wage (NMW) is the minimum pay per hour all workers are entitled to by law.
It was first introduced in 1999 and between then and 2006 it increased at a rate higher than the
average increase in wages. However, since 2007, the minimum wage has been decreasing in real
terms because CPI inflation has been higher than increases to the NMW. This has meant that there
has been a squeeze on pay for the 1 million workers covered by the NMW, roughly 5% of the total
workforce. There is much debate as to whether the NMW should be raised to the current ‘living
wage’ of £7.65. Despite its frequent application (most developed countries and many developing
countries have some sort of minimum wage regulation), it remains one of the most contentious
policy measures. On the one hand, it is argued that it helps reduce poverty, ensures that workers
have a minimum acceptable standard of living and that they are not exploited by unscrupulous
employers. On the other hand, the minimum wage is seen as causing unemployment and promoting
‘migration’ of jobs to cheaper countries. Boris Johnson argues that ‘it is morally right’ for low-paid
workers to receive a ‘living wage’. While the moral case is easy to appreciate, does increasing the
NMW actually make economic sense?
Fig 1
The biggest criticism of raising (and even having) the minimum wage is the argument that it will have
a detrimental impact on employment. This can be seen in Fig 1 which represents a perfectly
competitive labour market with an effective minimum wage set above the market equilibrium at
Wm. In theory, this would reduce the demand for labour (Q1 to Q2) and hence cause lower output
and in turn cause unemployment equal to Q2Q3. Demand for labour would fall because firms would
substitute in capital instead of employing labour at a higher price. Theoretically, a higher NMW will
raise the costs of production and thus is also likely to raise the price of final products, reducing
demand for final goods and further causing unemployment. Moreover, the loss of jobs is likely to be
concentrated on the unskilled workers who are easier to substitute for capital, or whose job can be
done by someone abroad at a lower wage. Therefore, the main criticism of raising the NMW is that
rather than doing any good, it will just cause unemployment among the unskilled poor, the exact
group the policy is designed to help.
However, reports have consistently concluded that there is little evidence of any adverse impact on
employment of low-paid workers following a modest raise in the minimum wage. Indeed, a study in
America followed the employment figures of fast-food chains in two states, one which raised the
minimum wage and one which didn’t, and found no evidence of it affecting employment levels. In
the same vein, in Nevada, where the national minimum of $7.25 an hour applies, the jobless rate is
10.2%. In Vermont, where the minimum wage is $8.60 an hour, the unemployment rate is 5.1%. The
evidence is conclusive; there is no clear correlation between modest raises in the minimum wage
and the rate of unemployment.
