3.3.3.3  Minimum Wage Policies

 (The latest version of this page is at Pattern Descriptions.  An archived copy of this page is held at https://www.patternsofpower.org/edition02/3333.htm)

Minimum wages were introduced to protect people against exploitation and to reduce inequality; they are a form of political regulation of the labour market.  Globalisation has now increased their importance: to limit the extent to which economic immigrants can undercut the wages of existing workers.  These are defensive measures, implemented for social and political reasons, rather than to improve the health of a country€™s economy. 

A minimum wage can also help the rest of society if it provides an incentive for people to work rather than claim benefits.  For this to be the case, a person in work must receive more money than someone on welfare, even if they are only working part-time, as illustrated:

This diagram illustrates a number of possible policy decisions:

·      It shows the effect of government welfare payments, as a socio-economic 'right', to those who are without work for whatever reason. 

·      It includes an incentive to work: as people move into part-time work, they become financially better off by doing so.  In other words, the reductions in welfare benefit should only be a proportion of their part-time earnings. Welfare payments vary according to family size and housing costs, but the principles illustrated should always apply. 

·      It illustrates that people who are in full-time work at the minimum wage could pay some tax, if the threshold for paying income tax (or National Insurance in Britain) is set below the minimum wage.  This has the political effect of making the individual aware of government spending as a burden, not just a cost-free entitlement.

·      The diagram includes the earlier illustration of a 20% basic rate of tax and a 40% higher rate, which is progressive taxation (3.2.4.1).

The minimum wage has to be set at an affordable level:

·      If it is set too high, above the equilibrium level of supply and demand for unskilled labour, it will result in unemployment €“ because some businesses might relocate lower-value tasks to other countries, or buy goods and services, in order to remain competitive. [1] 

·      If the minimum wage is set too low, workers have to claim benefits to supplement their incomes; this is helpful to the employers but it increases government spending.[2]

·      As The Economist noted, €œ[i]n flexible economies a low minimum wage seems to have little, if any, depressing effect on employment€�.[3]

Realism is needed, in relation to the prevailing economic conditions.[4]

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