arguments against the national minimum wage
1. A NMW set above the free-market wage for certain groups raises the marginal cost of employing people - so firms will cut jobs, reduce hours of work for employees and unemployment will rise
2. Other workers will demand higher wages to maintain pay differentials (this is known as "pay leap-frogging"). An increase in the total wage bill may cause cost-push inflation and damage the price competitiveness of UK producers in international markets
3. Young and low-skilled workers will lose out - firms will tend to employ older workers whose experience is greater. There will be a substitution effect that works against younger participants in the labour market
4. Some firms may cut back on investment in worker training because of falling profits
5. A minimum wage will not ease poverty because many poor households do not have a low-income earner. Poverty is concentrated in those groups where no one is in paid employment. A minimum wage has little direct effect on these households - better to introduce a minimum income guarantee
6. A NMW does not take into account regional differences in cost of living and will have a distortionary effect on the way the UK labour market works
The impact of a 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 (as in the diagram below) then the contraction in employment is likely to be less severe than if employers' demand for labour is elastic with respect to changes in the wage level.
Will the National Minimum Wage cost jobs?
Businesses have often expressed concern that a high minimum wage would cost jobs - both directly, because they would be unable to afford to employ more people, and indirectly, because other workers would bid up their own wages in an attempt to maintain their differentials with the low-paid.
Imposing
a minimum price for anything will in general, reduce the quantity that is
traded. A minimum wage may improve
the income of a few, but will deprive others of income. The effect in any
industry or occupation depends on the elasticity of demand and supply for
labour. The higher the elasticity
the greater the resulting unemployment, the impact of which will almost certainly
be felt almost entirely by the low paid.
David
Harrop,
of the Forum of Private Business, which represents small businesses, says
he is deeply worried. He claims its effects will be felt deeply in areas such
as retailing, hospitality and catering, and in certain parts of the country
like the North and Southwest.
Adair
Turner,
Director General of the CBI, said that while the £3.60 figure was "at
the top end of what is acceptable to business, overall it should not place
too much pressure on inflation or lead to major job losses".
Patrick
Minford (Thatcherite Economist) has suggested
the following effects of a national minimum wage on unemployment:
|
Where
the NMW is: |
(a)
50% of male median earnings |
(b)
2/3 male median earnings |
|
Million |
+0.5 |
+1.4 |
|
%
of labour force |
+1.8 |
+5.0 |
A study
by Bazen (1990) calculated the impact of a UK nmw
set at half of male median earnings using various macroeconomic models, which
gave a range of job losses of between 9,000 and 259,000.
Card and
Krueger in the United States - studied the levels
of employment in fast food restaurants in New Jersey and Pennsylvania in 1992,
before and after an increase in the minimum wage in New Jersey.
Their main results showed that there was an insignificant increase
in employment in New Jersey relative to Pennsylvania in 1992.
A further study in 1997 studied the effects of an increase in the minimum
wage in Pennsylvania, and concluded that there was no evidence of employment
losses in 1996.
The Official
View
The Department
of Trade and Industry say there is no evidence that the minimum wage will
cost jobs. "Independent research has shown that many firms have already
pre-empted the introduction of the minimum wage with no evidence of higher
costs feeding into large-scale job losses," a spokesman said. "In
the long run, the additional wage costs will be offset by increased productivity,
reduced staff turnover and absenteeism."
The
employment consequences of a minimum wage are by no means certain. Much depends
on the elasticity of demand for labour and the extent to which firms can offset
the impact of the NMW by increasing gains in labour productivity and achieving
other cost savings.
Minimum Wage and Inflation
|
Increase
in the wage bill (%) |
Effect
on RPIX inflation after one to three years |
||
|
First
Year (%
point) |
Second
Year (%
point) |
Third
Year (%
point) |
|
|
0.25 |
0.10 |
0.10 |
0 |
|
0.5 |
0.20 |
0.25 |
0 |
|
1.0 |
0.40 |
0.50 |
0 |
|
1.5 |
0.60 |
0.75 |
0 |
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