National Minimum Wage

UK Minimum Wage

  • The National minimum wage rate is currently £7.50 for workers over 25. The minimum wage was introduced in April 1999 (at £3.60) and is the legal minimum that employers can pay.
  • The aim of the National Minimum Wage is to help increase incomes of the low paid. It has become more important in a labour market characterised by a decline in trade unions and growth of low-paid service sector jobs.
  • Critics argue a National Minimum Wage can cause unemployment because firms cannot afford the workers. However, since it was introduced in 1999, the effect on unemployment has been lower than expected, with unemployment only increasing temporarily because of the recession in 2008. However, although the impact has been less than anticipated, future increases could place a strain on some employers.
  • Others argue that Minimum Wage rates are still too low and do not provide a ‘living wage’ in certain areas of high housing costs, such as London.

National Minimum Wage Rates from April 2017

  • £7.50  –  25 and over
  • £7.05 – Age 21-24
  • £5.60 – Age 18-20
  • £4.05 – Under 18
  • £3.50 – Apprentice rate.

Source: Direct Gov (1)

It is estimated 1 million workers (5% of workforce) receive the national minimum wage.

Forecast for National Minimum Wage

By 2020, the National Minimum Wage could reach £9.00 or more. The Resolution Foundation have suggested by 2020 the minimum wage could affect one in nine workers

History of National Minimum Wage

Year21 and over18 to 20Under 18Apprentice
2015£6.70£5.30£3.87£3.30
2014£6.50£5.13£3.79£2.73
2013£6.31£5.03£3.72£2.68
2012£6.19£4.98£3.68£2.65
2011£6.08£4.98£3.68£2.60
2010£5.93£4.92£3.64£2.50
uk national-minimum wage 199
source: Cosmogoblin CC SA, CC

 

Increased importance of minimum wage

UK_national_minimum_wage_percentage_changes_1999-2010.svg
Source Splash, Wikipedia, CC, SA.

Note: Since October 2010, the National Minimum Wage has increased from £5.93 to £7.20, whilst average wages have stagnated.

The National minimum wage has risen faster than average wages, especially since 2007

uk-real-wages-06-14

National Minimum wage compared to inflation and average wages

Benefits of a Minimum Wage

  1. Reduces poverty. The minimum wage increases the wages of the lowest paid. These workers will have increased  income and will reduce relative poverty.
  2. Increase productivity. The efficiency wage theory states that higher wages can increase the incentive for people to work harder and thus higher wages may increase labour productivity. If firms have to pay higher wages, they may put more focus on increasing labour productivity, which increases efficiency of the economy
  3. Increase the incentives to accept a job.   With a minimum wage, there is a bigger difference between the level of benefits and the income from employment. A minimum wage could also increase the participation rate as the benefits of work become greater and more worthwhile.
  4. Increased investment. Firms will have an increase incentive to invest and increase labour productivity because labour is more costly.
  5. Counterbalance the effect of monopsony employers. If firms have Monopsony power they can drive wages down by employing less workers. However, minimum wages will make this more difficult. Therefore a minimum wage could have a positive effect on employment.

Diagram of Minimum Wage on Monopsony

monopsony

A monopsony pays a wage of W2 and employs Q2. If a minimum wage was placed equal to W1, it would increase employment to Q1. Therefore, in some circumstances, it is feasible that a minimum wage could actually increase employment – or at least not cause any employment.

Arguably many firms can afford to pay higher wages, a minimum wage helps redistribute income in society.

Problems of Minimum Wage

1. Scope for unemployment

If labour markets are competitive, a minimum wage above the equilibrium could cause a fall in demand for workers, and excess supply

nmw

Above the equilibrium, the national minimum wage can cause unemployment of Q3-Q2

3. Certain industries vulnerable to a ‘living wage’

It is argued labour intensive industries, where labour costs are a high percentage of overall costs could be hit by a high National Minimum Wage. In particular care workers for old people are often paid the Minimum Wage. With a rise in number of old people needing care, this could significantly increase costs for old age care.

2. Regional variations in wages

A big problem with a national minimum wage is that wages vary enormously within the UK. In London, with higher costs of living, not many people get the minimum wage because wages are relatively higher. However, in some areas a minimum wage of £9 could cause significant unemployment, especially in labour intensive industries. It is estimated that in 10 hot spot low pay areas 30% of workers are on the Minimum Wage. (1)

3. Higher wages passed onto consumers.

An increase in the minimum wage could cause firms to increase prices and pass the costs onto consumers

4. More and more workers are getting stuck on the minimum wage.

More than 1 million workers receive the minimum wage. The highest proportion are amongst women, ethnic minorities and young people. The fear is that a minimum wage encourages firms to keep more workers on the lowest band of wages.

What is the best rate to set?

The desirability of a minimum wage depends on various factors:

  • State of the economy. During strong growth and falling unemployment, it is easier for firms to pay higher wages.
  • Elasticity of demand. Is demand for labour wage inelastic? or will some firms be very sensitive to higher wages. Some service sector jobs like hairdressers / cleaners may argue a small increase in their wage bill could lead to unemployment.
  • Regional wage rates. Could you allow for regional differences in wages? (e.g. a London specific minimum wage)
  • Type of labour market. Are labour markets competitive or monopsonistic?
  • Is there scope for firms to increase labour productivity? and therefore be able to afford the wage increases.

International minimum wages

Most Western economies adopt a legal minimum wage.

Minimum wagesData from OECD from 2011

min wage

Related

References

(1) National Minimum Wage Rate at Direct Gov