A recent proposal by George Osborne to increase the National Minimum Wage (NMW) has had a positive reception amongst politicians and the public alike. The plans include raising the minimum wage to £6.50, a 3% increase from the current rate of £6.31, with the possibility of further increases taking it up to £7 by 2015/16.
Is increasing the minimum wage the most effective way to tackle poverty, or will it do more damage than good?
There is a reason why raising the minimum wage is such a popular notion. Increasing the current rate for workers over the age of 21 to £6.50 is expected to add more than £370 a year to the pay packets of over 1 million people, and with inflation hitting low-income earners hardest, this is certainly a welcome development. Furthermore, with the UK finally experiencing strong economic growth rates, many feel it is only fair that the poorest people have their share of the recovery.
Unfortunately, however, there are drawbacks of a higher minimum wage and in order to analyse these it’s useful to look at the economics behind it. The minimum wage is what we call a price floor – it sets a minimum price for labour. Labour is traded like any other goods or service, and its price (or wage) is determined by how much it is supplied and how much it is demanded. Therefore setting a minimum price for labour will have implications on its supply and demand.
Increasing the minimum wage will mean that less labour is demanded by employers because of the higher costs. As a result, people on low paid jobs may see their working hours reduced, and some may even find themselves out of a job. Furthermore, employers will be less inclined to hire, so people will have more difficulty finding low paid work. The ultimate outcome will be an increase in unemployment.
The youth and unskilled will be most affected by changes in the minimum wage. Their employment prospects will be dampened as firms stop hiring in order to reduce costs. Moreover, many people employed in fast-food establishments or supermarkets, such as McDonald’s or Tesco, may find that they are replaced by machines.
http://www.youtube.com/watch?v=JO5MqkJW5i8
To clarify, nobody is saying that a 3% increase in the minimum wage is going to cause mass unemployment. On the contrary, the effects of this initial increase could be minimal. However, Osborne’s plan for a £7 minimum wage will be damaging to the labour market and will have the biggest impact on young people.
The UK government should realise that the only way to increase wages in the long term is through higher productivity. They should put more emphasis on improving education and training for young people. This will give them the skills and confidence to find work whilst increasing the value they bring to employers.
Raising the minimum wage may at first seem like an obvious solution to the income poverty in this country. However, once you shine a light on the economics it becomes clear that this would be a very short-sighted decision by the Chancellor of the Exchequer.
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