Transcript National Minimum Wage

National Minimum Wage
A2 Economics
revision
presentation on the
theory and practice
of the UK National
Minimum Wage
Some historical background
• 1909: minimum wages first introduced, covering
the “sweated trades” (via Wages Boards/Councils).
• 1986 – 1993: decline and abolition of Wages
Councils (covered 10% of workers at abolition).
• 1993 – 1999: no minimum wage except in
agriculture.
• 1999: introduction of National Minimum Wage
(NMW).
• Monitored by Low Pay Commission (made up of
employer reps, trade union reps and
independents).
The changing NMW in the UK
Year
Rate as % of
median wage
1999
Adult NMW
rate
£ per hour
3.60
2000
3.70
45.3
2001
4.10
48.0
2002
4.20
47.2
2003
4.50
48.6
2004
4.85
50.5
2005
5.05
50.5
45.6
Setting a pay floor
•
What is the economic case for a minimum wage?
•
Has the minimum wage in the UK proved to be a success?
Changes since 1999
Adult
Hourly
NMW
rate
Median
Hourly
earnings
Average
Earnings
index
Consumer
price
index
19992005
40.3%
26.6%
27.8%
8.5%
Average
annual
rise
5.8%
3.8%
4.2%
1.4%
What is a National Minimum
Wage?
• NMW is a statutory “pay floor”
• Tips can be included in minimum wage calculations if
they are paid through the PAYE system and appear on
salary slips
• NMW needs to be set above the normal free market
wage to have an direct effect on the labour market
• Employers are not allowed to “undercut” the NMW
• Employers are prosecuted if they do not pay the NMW
• Most other countries have something similar
• No commitment to an annual up-rating in line with prices
or earnings
Who have been the main
beneficiaries?
• According to the Low Pay Commission:
• Main occupations affected: Hospitality, retail, cleaning,
hairdressing, health and social work sectors
• Three-quarters (77%) of NMW workers are women
• Half (49%) are part-time workers
• More than two-fifths (43%) of NMW workers are both
female and part-time.
• Disproportionately young workers (24% are under
25 years of age)
• NMW has helped to narrow (slightly) the gender wage
gap at the bottom of earnings distribution
Aims/Advantages of a Minimum
Wage
•
(1) Reduce exploitation of lower paid workers (e.g. where
there is little or no trade union protection)
•
(2) Reduce the scale of relative poverty & inequality by
boosting incomes of low income households
•
(3) Reverse the effects of employer discrimination (e.g.
help to close the gender pay gap)
•
(4) Improve incentives for people to find work and reduce
benefit dependency by raising the “return to working”
•
(5) Expand the aggregate labour supply – this helps to
boost economic growth in the long term (outward shift of
PPF)
•
(6) The NMW should reduce the need for low paid workers
to claim “top-up state benefits” such as income support
and council tax benefit
•
(7) A NMW might reduce rates of labour turnover in many
jobs
The Low Pay Unit’s View
The Low Pay Unit has always argued that advanced
industrial societies like Britain have a duty to ensure
that all their people have the right to a just and
favourable remuneration for the work they do
Markets can respond to any number of different
influences and stimuli, but they never respond to
genuine need.
Therefore, the only equitable mechanism for ensuring
minimum standards in the labour market is a statutory
national minimum wage
A Pay Floor That Has No Effect
Wage Rate
£ per hour
Labour Supply
Free Market Wage
NMW
Introducing a minimum
wage at a rate below the
free market equilibrium
will have no effect on the
labour market
Labour Demand
E1
Employment
A Pay Floor Above the Free
Market Equilibrium
Wage Rate
£ per hour
Labour Supply
NMW
NMW
Free Market Wage
Labour Demand
E1
Employment
A Pay Floor Above the Free
Market Equilibrium
Wage Rate
£ per hour
Labour Supply
NMW
NMW
Free Market Wage
Labour Demand
E1
Employment
A Pay Floor Above the Free
Market Equilibrium
Wage Rate
£ per hour
Excess Supply
Labour Supply
NMW
NMW
Free Market Wage
Labour Demand
E2
E1
E2
Employment
A Pay Floor Above the Free
Market Equilibrium
Wage Rate
£ per hour
Excess Supply
Labour Supply
NMW
NMW
Free Market Wage
A minimum wage set above
the free market wage may
have the effect of creating
an excess supply of labour
at the ruling pay floor
Labour Demand
E2
E1
E2
Employment
The Importance of Elasticity of
Demand for Labour
Wage Rate
£ per hour
Labour Supply
NMW
NMW
Free Market Wage
Labour Demand
E1
Employment
The Importance of Elasticity of
Demand for Labour
Wage Rate
£ per hour
Labour Supply
NMW
NMW
Free Market Wage
Labour Demand
E2
E1
E2
Employment
The Importance of Elasticity of
Demand for Labour
Wage Rate
£ per hour
Labour Supply
NMW
NMW
Free Market Wage
When labour demand is
inelastic, the employment
effects of a NMW are less
pronounced – perhaps
because businesses feel
able to pass on the higher
costs to final consumers
Labour Demand
E2
E1
E2
Employment
Impact When Labour Demand is
Elastic
Wage Rate
£ per hour
Labour Supply
NMW
NMW
Free Market Wage
Labour Demand
E1
Employment
Impact When Labour Demand is
Elastic
Wage Rate
£ per hour
Labour Supply
NMW
NMW
Free Market Wage
Labour Demand
E2
E1
E2
Employment
Impact When Labour Demand is
Elastic
Wage Rate
£ per hour
Labour Supply
NMW
NMW
Free Market Wage
Labour Demand
When labour demand is
elastic, a rise in the NMW
may cause a sharp
contraction in labour
demand (cet par)
E2
E1
E2
Employment
A Rise in Labour Productivity or
Higher Demand
Wage Rate
£ per hour
Labour Supply
NMW
NMW
Free Market Wage
LD1
E1
Employment
A Rise in Labour Productivity or
Higher Demand
Wage Rate
£ per hour
Labour Supply
NMW
NMW
Free Market Wage
LD1
E1
Employment
LD2
A Rise in Labour Productivity or
Higher Demand
Wage Rate
£ per hour
Labour Supply
NMW
NMW
Free Market Wage
LD1
E1
E2
Employment
LD2
A Rise in Labour Productivity or
Higher Demand
Wage Rate
£ per hour
Labour Supply
NMW
NMW
Free Market Wage
If workers become more
productive, then the unit cost of
what they produce at a given
wage rate will go down. This
may cause an outward shift in
labour demand – and possible a
higher level of employment
despite the NMW
LD1
E1
E2
Employment
LD2
Disadvantages of a National
Minimum Wage
• (1) Fall in employment due to higher wage costs
• (2) Danger of “pay-leapfrogging” as workers seek to
maintain existing wage differentials
• (3) Risk of higher wage inflation (higher interest rates?)
• (4) Damages competitiveness of some firms
• (5) The NMW is not the most effective way to reduce
relative poverty
• (6) Free-market economists believe that a NMW creates
artificial distortions in the way the labour market works –
let wages find their own level – a source of government
failure?
Evaluation: Alternatives to the
National Minimum Wage
• Low wage subsidies
• Tax breaks for low-income families
– (i) earned income tax credit
– (ii) provides an incentive to seek and then
hold a job
• Improve education (e.g. secondary
schooling)
People on wages close to the NMW
Financial Times on the Minimum
Wage
• “Statutory minimum wages should be safety nets, not
incomes policies. They can tidy up the low-wage end of
the labour market by stopping monopsonistic employers
- those with buying power - using their control over
workers to hold down pay. They cannot and should not
be used to engineer substantial redistributions of
income. That way higher unemployment lies.
• The rises so far, which have taken the adult minimum
rate from £3.60 to £4.85, have had little apparent effect
on employment - not least because, thanks to
inadequate wage data, initial rates turned out to cover
far fewer workers than expected. But the era of
repeated large increases in the minimum is likely to be
drawing to an end."
Further recent evidence
• Many companies set their own minimum wages higher
than the national rate, according to the Labour Market
Trends survey
• Employers tend to pay at least £5.50 or £6 an hour
rather than the national minimum wage (NMW) of £5.05
per hour for workers over the age of 22, the research
revealed.
• The higher rates indicate that companies would rather
set their own rates of pay at round numbers and absorb
the extra labour costs
• The NMW is due to rise to £5.35 an hour (for employees
over the age of 22) in October 2006 and to £4.45 an
hour (up from £4.25) for 18-21 year olds.
Low Pay
• Estimates from the Annual Survey of Hours
and Earnings show that the number of jobs
paid below the national minimum wage in
the UK was 327,000 in Spring 2005,
amounting to 1.3 per cent of all jobs in the
labour market.