Arguments for and Against the Minimum Wage in the Uk

Arguments for and against the National Minimum Wage (NMW) in the UK: stop employees being taken advantage of by being paid unfair wages by their employers. set a standard of the minimum worth of a worker. This benchmark was set so that employers would be unable to hire any staff for less than the suggested hourly rate. reduce pay differentials between genders. What is the new minimum wage? : In October 2009, the NMW for workers increased from: ?5. 73 to ? 5. 80 per hour – aged 22 years and older ?4. 77 to ? 4. 83 per hour – aged 18 to 21 years ?3. 53 to ? 3. 7 an hour – aged 16 and 17 years As of October 2010, the adult minimum rate will start from 21 years. Who qualifies for the Minimum Wage? Home workers, agency workers, part-time employees, pieceworkers… most adult employees working legally in the United Kingdom with a written, verbal or implied contract, qualify for the NMW. The relationship between Demand and Supply: Arguments in favour of the NMW: Diagram showing potential earnings from the NMW: {draw:frame} Diagram showing increasing demand for Normal goods: {draw:frame} Reduced labour turnover, raised productivity:

Economic benefit for the country: Monopsonistic labour markets: A monopsony occurs when one buyer faces many sellers in a market. The buyer thus controls a large proportion of that market share. In the diagram below, a monopsonistic business maximises its profits at Q2, paying a wage at W1. (Demand = Marginal Revenue Product and supply =Average Costs). If the minimum wage increases to W2, demand for labour will increase to Q1. The level of unemployment will not increase until the minimum wage increases to an amount higher than W3. Diagram showing NMW effects on a Monopsony: draw:frame} Arguments against the NMW: Law not properly enforced: The NMW is not a properly enforced law. The result is that is has merely become a guideline to which employers are expected to adhere. It is estimated that 5% of the UK workforce receives less than minimum wage (WordPress 2009). If an employee reports his employer for paying less than the minimum wage, the employee pays a nominal fine. Fines are not severe enough (HM Revenue and Customs 2009). Low-skilled workers suffer: Many opposed the NMW when it was first introduced.

Some believed that it would increase unemployment and cause wage inflation. They argued that if the minimum wage was high enough to be effective, unemployment among the inexperienced and handicapped would escalate. The workers with lesser skills would be harmed to the benefit of those who were more highly skilled. The demand for jobs at the higher wage levels would be greater than the supply of jobs available. Businesses could therefore afford to be more selective in the employees they chose, and workers with limited skills and experience would typically be excluded.

Cost of production increases, leading to higher prices for consumers: Another argument is that an increase in the minimum wage willincrease production costs, thus increasing the overall cost of the product. The result of this would be reduced profits for the business, due to: producers absorbing the extra costs, leaving less money for re-investment. Diagram showing how an increase in the price of a product affects supply and demand: {draw:frame} The original price of product X is ? 35, and the demand for the product is 320 units (E1 representing Equilibrium between demand and supply). Product X then increases in price to ? 4 due to an increase in the NMW, resulting in a drop in demand for the product to 120 units. This drop in demand then results in an oversupply of goods from the producer, who is then forced to reduce his supply to the new demand level, or goods may sit on the shelf. E2 represents the new Equilibrium level between supply and demand. If the good was perishable and the supplier did not adjust his supply, there would be a lot of wastage. Not everybody qualifies: Those who are exempt from receiving the NMW include; Apprentices under 19 years of age, and apprentices 19 years or older in their first year of their apprenticeship.

Students on a work placement, forming part of a higher- or further education course, where the placement is for less than one year. The self-employed Those on a Department for Workers and Pensions back-to-work scheme The Recession: A recession is characterised by a period of at least two consecutive quarters of negative growth. During a recession, demand and supply of goods and services in the economy contracts. The UK economy contracted by 1. 5% in the last quarter of 2008 and the Gross Domestic Product experienced its biggest fall since the second quarter of 1980 (Kowelle 2009).

This is the first time since the inception of the NMW that employment has fallen. Unemployment is rapidly on the increase. A reduction in output means that the need for labour is reduced. In the early stages of a recession, companies tend to cut back on employee hours, rather than making workers redundant. If companies are forced to reduce their employee numbers, they will initially attempt to do this through natural wastage, putting a hold on hiring, and not replacing workers who leave the company of their own accord.

Thus the demand for new entrants to the market is very limited. The current recession has caused a very limited availability of credit and reduced demand worldwide. It is expected that high levels of debt and the fall of housing prices and equity prices will affect the UK more than many other nations (Bain 2009). What if there were no minimum wage in place? : Without a set minimum wage, the quantity of labour supplied will continue to change according to price, until the level of labour demanded is equal to the level of labour supplied.

That is to say, an equilibrium price will be reached, where supply and demand curves intersect. {draw:frame} Deepak Lal, criticises the minimum wage, stating that it is “an inefficient, well-intentioned but inexpert interference with the mechanisms of supply and demand.. ” References: DEPARTMENT FOR BUSINESS INNOVATION & SKILLS. , 2007. National Minimum WageGuide for Employees [online] United Kingdom. Available from: http://www. berr. gov. uk/files/file53059. pdf [Accessed 23 November 2009] eHOW How To Do Just About Everything.

How Does The Minimum Wage Affect The Economy [online video]. Available from: http://www. ehow. co. uk/video_4974004_minimum-wage-affect-economy. html? cr=1 [Accessed 20 November 2009] NATIONAL MINIMUM WAGE COMMISSION. , 2009 National Minimum Wage. Low Pay Commission Report 2009. (Chairman George Bain). United Kingdom: The Stationery Office. WORD PRESS. , 2009. New Deal Scandal: UK Unemployment Course Scandal and Welfare Reformconcerns [online] 20 August. Available from: http://newdealscandal. wordpress. com/2009/08/20/national-minimum-wage-nmw/ [Accessed 23 November 2009]