3.3.3.3 Minimum Wage Policies

(This is a current page, from the Patterns of Power Edition 3 book contents.  An archived copy of this page is held at http://www.patternsofpower.org/edition03/3333.htm)

Minimum wages are widespread.[1]  They 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.  There are several considerations in deciding the level of a minimum wage:

  • As The Economist noted, “[i]n flexible economies a low minimum wage seems to have little, if any, depressing effect on employment”.[2] If it is set too high though, especially if it is above the equilibrium level of supply and demand for unskilled labour, it will result in job losses – because businesses might replace labour with mechanisation, or relocate work to other countries, or buy goods and services, in order to remain competitive.[3]
  • If the minimum wage is set too low, workers have to claim benefitsto supplement their incomes; the employers gain, but government spending has to increase – a point described in January 2014 as “The Curious Conservative Case for Increasing Nationwide Minimum Wage to $12 an Hour”:

“Ron Unz, a Silicon Valley multimillionaire and registered Republican who once ran for governor and, briefly, U.S.  Senate, wants state voters to endorse the wage jump that he predicts would nourish the economy and lift low-paid workers from dependency on food stamps and other assistance bankrolled by taxpayers.”

  • If the minimum wage is set above the level of welfare guarantee for a single person, it acts as an incentive to work.
  • Some families, especially those with more than one person earning, would pay more tax with a higher minimum wage.
  • A higher minimum wage might adversely affect employers (unless they could raise prices without losing sales); it could depress their profits and reduce the amount of corporation tax they pay.
  • A government benefits from a higher minimum wage if it can successfully balance its impact on tax receipts and in-work benefit payments, taking account of possible job losses and lower profits, as illustrated:
  • Governments also have to calculate the effect of minimum wages on economic growth. There will be a higher level of consumer demand if low-paid people have more money in their pockets, but that is offset to some extent by the adverse impacts of job losses and higher prices.
  • A relatively high minimum wage acts as a magnet for economic migration from other countries where it is lower (notably within the EU, where free movement of labour is a condition of membership). An increased supply of labour depresses wages – so an increasing proportion of jobs would be at or just above the minimum wage.

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

© PatternsofPower.org, 2014

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[1] In March 2018, a history of the minimum wage was available at http://bebusinessed.com/history/history-of-minimum-wage/.

[2] On 14 December 2013, The Economist published an article entitled The logical floor which explained why, in the absence of a minimum wage, employers could pay less than the market rate because people find it hard to move; the article was available in March 2018 at http://www.economist.com/node/21591593.

[3] Samuelson and Nordhaus described the relationship between the minimum wage and supply and demand in chap.  4, op.  cit., pp.  66-67.

The NBER published some empirical data in Working Paper No.  12663, in November 2006, which was available in March 2018 at http://www.nber.org/papers/w12663.

On 25 July 2015 The Economist published an article entitled Minimum wages: A reckless gamble, which analysed the impact of the minimum wage on unemployment; it was available in March 2018 at http://www.economist.com/node/21659741.

[4] The above Economist article at http://www.economist.com/node/21591593 noted that Britain’s minimum wage, at 47% of median income, “does not seem to have pushed many people out of work”.  France’s minimum wage though, at 60% of median income, has been accompanied by “shockingly high rates of youth unemployment: 26% for 15- to 24-year-olds.”