National Minimum Wage | Advantages and Disadvantages

Introduction

The following report argues on the matter of United Kingdom’s national minimum wage, which is be considered important in context of social security, collective bargains and mostly the labour markets to increase justice and improve economic efficiency of the country. The aim of introducing national minimum wage was to bring UK in the line with other members of EC. (The new review 1991).

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UK National minimum wage

The introduction of minimum wage was the main programme of labour party, in the year 1991 the government set up a low pay commission in order to recommend and decide the level of NMW. The national minimum wage is one of the most significant labour market involvements that the labour government has made. The main feature of this law was to provide a fairer wage to low paid workers without limiting their employment opportunities or harming the efficiency of business. The minimum wage was introduced in 1999 which is being showing tremendous growth.

Experts at Loughborough’s Centre for Research in Social Policy (CRSP) have calculated a minimum wage on public views, considering acceptable minimum standard of living workers need to earn 7.14 an hour which means the hike in 5.80 -5.93 is much more lesser than needed .

Recent national minimum wage

Government introduced new NMW rates on 1st Oct 2010 in accordance to market needs. following are the new wage rates

• 21 and above – £ 5.93
• 18-20- £4.92
• Below 18- £3.64
• Apprentice- £2.50

Aim of national minimum wage

• Equity justification
• To gain labour market incentives
• Fight against labour market discrimination
• To set up a price floor where employees can get a minimum wage per hour

Supply of labour

The supply of labour mainly refers to the amount of hours the labour is willing to work at a given wage rate. This term can also be explained as the number of workers willing and able to do work in a given occupation or industry.

If talking in context of labour supply curve for any industry or occupation will be upward sloping because as wages increase the workers enter the respective industry. Depending upon the rise in prevailing wage or salary in an occupation leads to an expansion in the supply of labour depending upon their elasticity. ( [i] )

National minimum wage has a direct effect on supply of labour. The introduction of national minimum wage tends to cope up the spirit to actively search for work. Around 2 million people working in traditional manner paid with lower wages have seen their pay levels affected after the launch of national minimum wage.

Inflation or deflation in national minimum wage (NMW) has adverse effect on supply. In a perfectly competitive labour market, the equilibrium wage should be (W1), where labour supply = labour demand. When the price floor is imposed wages are automatically changed. Hence when there is an increase in wage rate (W2) supports the economically inactive to enter the labour market, resulting in excess of supply of labour (E2). It also increases the marginal cost (MC) of employing the workers resulting in contraction of labour demand.

Adversely when there is a decrease in NMW (W3) there is a hype seen in the employment rate. Companies will try hiring new employees as the cost of hiring is less. This will result in more employment.

Demand of labour

It can be stated as the need for workers in a firm. It is depended on amount of wages paid on the basis of sales of the product produced. This may not be in long run equilibrium and can be determined as real wage. On the widespread beliefs Leif Danziger says “low pay workers may not prefer the minimum wage rate be increased to a extend where demand is unitary elastic”. Instead their critical value of elasticity of labour demand such as increase in the minimum wage gives low pay workers better off for higher elasticity’s, but worse for lower.( [ii] )

In demand side it is assumed that the higher the wages, fewer the hours an employer will demand to do less hours to the employee. If the wage rate is high it is more costly to hire more employees. When the wage rate is low it is cheaper to invest in labour.

The diagram states that when there is a fall seen in the wage rate from W1 to W2 the firm will see a hike in employment from E1 to E2. This happens as the labour inputs have become relatively cheaper. Whereas a rise in wage from W1 to W3 causes less employment E1 to E3 as the company has to face big employee budget, finally leading in unemployment.

Argument

There are various groups who have great ideological, political, financial and emotional investment in matter of surrounding minimum wage law. as discussed in pros and cons of minimum wage many of the economists agree to eliminate it as it costs thousand jobs for economy, part timers, teenagers get a limited access and opportunities to jobs.

Whereas some economists think adults that are working in jobs at minimum wage may loose their jobs to young workers working on lower wages. And also businesses may get chance of abusing labour market.

Factors in favour of NMW

Enhances Standard of living

The national minimum wage helps poor people improve their standard of living. In addition when people are employed they get a feeling of being wealthier, likely to have more disposable income. This automatically means there is more aggregate demand in the economy leading to higher level of consumption and consumer spending(business demand) which heightens the standard of living. This generally means making people(employers) happy. http://www.robparker.org.uk/articles/uk-economy-labour/unemployment/

Poverty

Due to introduction of National minimum wage workers with lower pays have got increase in the hourly wage as the employers have to pay the legal wage. This has helped reduce the poverty as the workers receive significantly increased weekly income.

As the wage was determined it helped the government reduce poverty in the country. in uk 2007 -08, there were 13.5 million individuals in poverty. In the year 1998 1999 and 2004-05 labours saw the biggest decline. This decline came to an end during 2004-2005 and UK has seen a growth for three consecutive years.

On the other side that the poorest sections of society tend to rely on benefits as JSA & incapacity provided by the government of which 60% are unemployed. So these people are not benefited by NMW. Many of the second income earners can be well and would not be counted as poor, this is one of the limitations of NMW reducing poverty.

Discrimination

The implementation of NMW helped reduce discrimination against age, gender, race religion, sexuality or disability. It also acts as a tool for reducing male female age differentials.

• Categories for casual factors of discrimination
• Component wage
• Powerful employer
• Weak representation
• Job segregation
• Social hierarchies
• Government needs to provide Less benefits

Arguments against NMW

Inflation

Inflation in regards to NMW

After the increasing NMW by 13p hourly payment to 5.93. i.e. 2% rise have been recommended by low pay commission and accepted by labour party. But the rise in NMW lags far behind inflation as RPI which is used as bench mark fpr pay rises by 5.1% in May 2010.

http://www.walletpop.co.uk/2010/06/22/minimum-wage-to-go-up-by-13p-far-less-than-inflation/

http://www.parliament.uk/documents/documents/upload/lln2010-008.pdf

Unemployment

Increase in NMW may cause unemployment. As the wage budget is increased companies tend employ less employees directly resulting in unemployment. Unemployment can emerge in two ways when there is less demand of work or when there is more supply of labour.

If measured in terms of the number of people claiming benefits, the total dropped from the last point of 2.9 million in 1993 to 800000 in 2008 and so on since 1975.

Tax burden under labour

With increase in NMW brings wealth and improves standard of living and more buying power like buying of products and commodities to the labour which results in paying tax.

As shown in the figure below labour inherited a tax burden of 34% in 1996-97. Due to a fall in stock market between 2000- 03 the rise in the tax dropped. It again rose reaching 36.1% of national income in 2006-2007.

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http://www.ifs.org.uk/bns/bn91.pdf

The above diagram shows current receipts and net taxes and national insurance contributions of labour graph from 1951-2015.

Advantages of national minimum wage

Supporters of NMW argue that a minimum wage could act as a catalyst for greater organisational efficiency, by making employees use their labour skills more effectively.

Following are the advantages of the national minimum wage considering supply and demand:-

It increases the standard of living of poor people and help raising average.

National minimum wage provides motivation and encouragement to employees to work due to increment of wages.

Low income people are provided with more money which help stimulate consumption as well as it increases work ethics to those who earn a little as employers demand more return as their hiring cost is higher.

The increase in NMW also helps by social means as it encourages more people to join workforce rather than gaining through illegal means, it also helps government by decreasing the social welfare programs by increasing incomes of the lower level.

Disadvantages of national minimum wage

Increase in the minimum wage may cause price inflation as the firms pay higher wages to the employees.

Effects on employment are seen when the demand of work is contracted and unemployment is increased when supply is extended

The competitiveness can suffer low wage economies

The investment may be deterred as foreign investors may avoid high wage economies

A NMW does not consider regional differences in living cost and may have an adverse effect on the way UK labour work.

Source:

http://tutor2u.net/economics/content/topics/poverty/minwage_against.htm

Conclusion

As seen national minimum wage has a greater impact on many aspects like . starting in the year 1999 by labour party with a minimum wage of £3.60 has reached 5.93 stated on 30th October 2010. As seen above national minimum wage has both sides positive as well as negative depending upon the way of looking towards it.