Monday, October 19, 2009

Why Minimum Wage Is A Must?

A minimum wage is the lowest hourly wage an employer is obliged to pay to workers, below which is illegal for them to hire anyone. In UK, the national minimum wage (NMW) has come through a long way since first introduced in 1999 by the Labour. Since implemented, its advantages are as equally divided as its disadvantages

Supporters in general claim that this system can help the socially most disadvantage group, i.e. those with lowest paid. On the other hand, opponents claim that if it is high enough to be effective, unemployment will increase. In the end it will be a lose-lose situation for both parties

The latest statistics for minimum wage:

22 years and above--> an increase of 7p to £5.80
18-21 years --> an increase of 6p to £4.83
16-17 years --> an increase of 4p to £3.57

Let’s examine the situation


(1) Poverty reduction. A mandatory annual increase in minimum pay is highly applauded by the most vulnerable group of the society. With increasing income, they are able to purchase more necessities especially food and on clothing. Although may not be significant, at least their standard of living increases

(2) Increase productivity. Everyone reacts to incentive. That is human nature. Workers especially the less-skilled one will be motivated to work harder since now the take-home pay has increased. This will result in lower production costs as total costs are spread over a larger range of output. However, the claim is only true if output increases at a faster rate than increase in wages

(3) Incentive to look for jobs. Again this affects the less-skilled workers. When there is an increase in NMW, the gap between benefits and income from employment widens. It increases the opportunity cost of staying unemployed. As such, more will be pressurised to enter the job market. If this materialise, there will be lesser spare capacity in British economy and UK may produce nearer to PPF

(4) Increase investment. Firms which employ many low-paid workers will now feel greater pinch to their margin. To stay profitable and competitive, they will have to invest for instance in better technology to reduce costs per unit. Also they will find ways to increase labour productivity

(5) Steer economy forward. UK is a consumption driven economy and this component of spending is standing at about 70% of her GDP. It must be acknowledged that poorer people has higher marginal propensity to consume (MPC). In other word, they spend larger proportion of their income to buy things than the rich

(6) Compensate for monopsony power. Normally, it is those multinational firms that have such power. They could be a major employer in an area. It could also be a firm which is one of its own kind that many workers depend their livelihood on. As such they possess strong bargaining power and can easily exert downward pressure on wages. With the mandatory minimum pay, big firms find that it is now more difficult to flex their bargaining muscle

(7) Reduce cost of government. Increase in minimum pay will significantly help to reduce the financial burden of UK government. This is because, the state no longer have to spend so much onto social security programs such as providing cash assistance to the needy or even some other benefits to single mother with a child. The social burden is now corporate responsibility

However, it is not without problems:

(1) Cost-push inflation.
Critics argue that the welfare of the lowest paid will not improve. While firms do give in, eventually they factor in the higher wages as part of production costs. Therefore the selling price is now higher. It is associated with the phenomenon of cost-push inflation (Unit 2). Also it is just a matter of time before the lower income people begin to realise that they are being priced out once again. In return, they will bargain for higher salary. The vicious cycle will repeat itself. Soon price level in UK may become too high

(2) No effect on poorest. In theory, increase in minimum wage will raise the standard of living. However, the rise must be high enough to create such impact. I’m highly doubtful how an increase of 7p to £5.80 for those aged 22 and above can do them good. Even in better times, an increase of 15p is highly unlikely to change the welfare of an ordinary worker because the cost of living increases at a faster pace

(3) More young people entering job market. The introduction of minimum pay even to workforce as young as 16-18 years old is said to have enticed more people to abandon their education to adopt a working life at immature age. Supplemented by asymmetric information, youths may not be well aware of the greater private benefits they might get when they obtain a basic degree for themselves. While it is true that they have income while their friends spend time studying, the potential for their friends to earn big income for the rest of their life is much higher

(4) Loss of jobs. With minimum wage, firms will demand lesser workers. At the same time, higher pay attracts more people to supply their labour. The gap created between these two is called unemployment

No comments: