Evaluation of the Economics of a £7 National Minimum Wage

Labour Market EconomicsFebruary 2014

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Low pay has long been an issue in the UK (and elsewhere) with debate raging about how to address the issue.

Trade Union power has been in decline however New Labour acknowledged that low pay was a market failure and introduced the National Minimum Wage (NMW) in 1999.

The NMW increased in real terms until the start of the recession after which inflation has outstripped minimum wage growth.

Recently, the idea of a Living Wage has divided opinion even further!

.......what do you think?!!

Case Study: Low Pay in the UK

Background Data on Low Pay and High Pay in the UK Labour MarketMedian full-time gross weekly earnings by major occupation group, UK, April 2013

£ per weekMajor occupation group Men Women AllAll 556.0 458.8 517.51 - Managers, directors and senior officials 821.2 651.6 765.12 - Professional occupations 755.0 655.2 703.23 - Associate professional and technical occupations 624.7 519.0 582.44 - Administrative and secretarial occupations 436.8 384.3 399.65 - Skilled trades occupations 486.3 345.3 476.16 - Caring, leisure and other service occupations 370.4 325.5 336.77 - Sales and customer service occupations 345.0 321.5 331.28 - Process, plant and machine operatives 450.0 325.8 436.19 - Elementary occupations 360.0 284.5 336.4

Source: Annual Survey of Hours and Earnings - ONS, published December 2013

The National Minimum Wage

Group2013 (current rate of NMW)

Number of people paid below NMW

21 and over 6.31 203,000

18 to 20 5.03 57,000

Under 18 3.72 19,000

Apprentice* 2.68

Source: https://www.gov.uk/national-minimum-wage-rates

Earnings for full-time employees, UK, 2009 to 2013

£

Gross hourly earnings (excluding overtime)

Year

Median gross weekly

earnings

Median gross annual

earnings Median10% earned

less than10% earned

more than2009 488.5 25,806 12.33 6.90 25.902010 498.5 25,882 12.50 7.00 26.282011 500.7 26,244 12.62 7.01 26.752011 498.3 26,095 12.56 7.00 26.602012 506.1 26,472 12.77 7.17 26.62

2013 517.5 27,017 13.03 7.28 27.02Source: Annual Survey of Hours and Earnings - Office for National Statistics

Distribution of gross hourly earnings (excluding overtime), UK, April 2013 £ per hour

Full-time

Part-time AllMen 10% earned less than 7.50 6.19 6.90 50% earned less than 13.60 7.95 12.86 10% earned more than 29.59 23.65 28.88Women 10% earned less than 7.00 6.19 6.40 50% earned less than 12.24 8.40 10.33 10% earned more than 23.55 19.50 22.13All 10% earned less than 7.28 6.19 6.56 50% earned less than 13.03 8.29 11.56 10% earned more than 27.02 20.21 25.42

Source: Annual Survey of Hours and Earnings - Office for National Statistics

The Minimum Wage

Real wage

Quantity of workers

S

D

W1

NMW

Q3 Q1 Q2

54

The Minimum Wage…. The winners

Real wage

Quantity of workers

S

D

W1

NMW

Q3 Q1 Q2

54

The Minimum Wage…. The losers

Real wage

Quantity of workers

S

D

W1

NMW

Q3 Q1 Q2

54

Monopsony Employer AnalysisWage

Labour (Employment)

Monopsony Employer

MC labour

Labour Demand (MRPL)

Labour supply

Profit maximising employment level is where MRPL = MC labour

This gives employment of E1 – the marginal revenue product is W1

But employer needs only pay an average weekly wage of W2 to hire these workers

Monopsony employer using their buying wage to pay wages below the fair value of output from their employees

An abuse of market power?A cause of relative poverty?

W1

W2

E1

Monopsony Employer with a statutory Minimum Wage

Wage Possible Effects of a Minimum Wage

Labour (Employment)

MC labour

Labour Demand (MRPL)

Labour supply

Minimum wage is a pay floor

Minimum hourly pay rate

Must be set above usual free market wage

Monopsonist must pay this wage

Employment rises to E2

More people employed at a higher wage

Other factors affecting wages are held constant in this analysis

Min Wage

E2

W2

E1

1. Incentivises workAnalysis: Income gap between minimum wage (aided by increase of personal allowance) and benefits (aided by welfare cuts) has increased hence increasing opportunity cost of not working = greater supply of labour and job vacancies filledEvaluation: ‘Winners and Losers’• This is particularly relevant to those workers in the

unemployment trap• Reduced demand for labour, some people lose their job• Still 400,000 vacancies in the UK

Arguments for the £7 per hour minimum wage

2. Less need for ‘benefit top up’Analysis: If minimum wage workers receive an income which is deemed satisfactory (be careful!!) then there is less need for the taxpayer to fund tax credits and other income top ups. This money can then be allocated into other areas ie schools/hospitals.Evaluation:• It is more efficient with less chance of government failure if

government does not need to be involved!• The role of government is to help out the people who need

them rather than leave it to firms!!

Arguments for the £7 per hour minimum wage

3. Boosts spending power of those on low incomesAnalysis: often spend that money in the local community creating a strong local multiplier effect and with few leakages. This takes some people out of poverty and reduces inequalityEvaluation:• Some people are stuck in the benefit trap i.e. they lose benefits

due to their extra income which can negate the extra income and even result in less disposable income!

Arguments for the £7 per hour minimum wage

4. Reduction of male-female pay differentials.Analysis: Male-female wage differentials are reduced, as a substantial proportion of those on low pay who benefit from the NMW and increases are female.Evaluation: Of course this doesn’t address the issue of gender pay discrimination as shown recently:

Arguments for the £7 per hour minimum wage

5…. in the case of a monopsony employer ie NHSAnalysis: A minimum wage can help to counter the power of a monopsonist employer. In this case the NMW could both increase wages and save jobs. The framework for analysis is the same as that for analysing the impact of a trade union in a monopsonistic labour market.

Arguments for the £7 per hour minimum wage

However...a key counter argument to the NMW is……..

Higher wage costs may filter through…..Analysis: If the minimum wage adds to the cost of production, then UK goods become more expensive causing cost push inflation which hits living standards if they are necessities and also reduces UK competitivenessEvaluation: • Bosses should push for compensating rises in productivity to

offset this problem• In many areas, the UK is unable to compete on price and to do

so by the rationale above would mean paying poverty wages

So…..a reasoned conclusion

That’s your call………..!! But:1. Don’t repeat

2. Don’t sit on the fence

3. Answer the question

My view is that there is little evidence to suggest that the NMW has resulted in real wage/classical unemployment and as such the incentive and income effects more than justify its introduction and it increasing above the rate of inflation and of benefits growth. As such, I think we should be proud of it.

………………….But you may disagree!!

Synoptic answers

Although this question relates to the labour market – it is an example of a government intervention that has wider economic effects – try to include some of these in your answer. A2 exams are synoptic so, do use AS (unit 1) concepts such as

– Elasticity

– Consumer and producer surplus

– Externalities and welfare losses/gains

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