Evaluation of the Economics of a £7 National Minimum Wage Labour Market Economics February 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 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 Market Median full-time gross weekly earnings by major occupation group, UK, April 2013 £ per week Major occupation groupMenWomenAll Managers, directors and senior officials Professional occupations Associate professional and technical occupations Administrative and secretarial occupations Skilled trades occupations Caring, leisure and other service occupations Sales and customer service occupations Process, plant and machine operatives Elementary occupations Source: Annual Survey of Hours and Earnings - ONS, published December 2013

The National Minimum Wage Group 2013 (current rate of NMW) Number of people paid below NMW 21 and over , to ,000 Under ,000 Apprentice*2.68 Source:

Earnings for full-time employees, UK, 2009 to 2013 £ Gross hourly earnings (excluding overtime) Year Median gross weekly earnings Median gross annual earningsMedian 10% earned less than 10% earned more than , , , , , , Source: Annual Survey of Hours and Earnings - Office for National Statistics

Distribution of gross hourly earnings (excluding overtime), UK, April 2013 £ per hour Full-timePart-timeAll Men10% earned less than % earned less than % earned more than Women10% earned less than % earned less than % earned more than All10% earned less than % earned less than % earned more than Source: Annual Survey of Hours and Earnings - Office for National Statistics

The Minimum Wage Real wage Quantity of workers S D W1 NMW Q3Q1Q2 54

The Minimum Wage…. The winners Real wage Quantity of workers S D W1 NMW Q3Q1Q2 54

The Minimum Wage…. The losers Real wage Quantity of workers S D W1 NMW Q3Q1Q2 54

Monopsony Employer Analysis Wage 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? 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 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 work Analysis: 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 filled Evaluation: ‘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 incomes Analysis: 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 inequality Evaluation: 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 NHS Analysis: 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 competitiveness Evaluation: 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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