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The Minimum Wage Debate

Politicians are now turning to law to increase the minimum wage that businesses must pay their staff. This is taking us into unknown territory and there are conflicting opinions among economists as to the short and long term effects that this will have on employment. 


Britain’s minimum wage increase, which will come into effect from October 2015, of 3% to a new figure of £6.70 per hour, takes us from the average among OECD countries to high, with 1.4 million people set to benefit. In the past, cash increased minimum wages have devalued over time by inflation, as the wage is set and is not affected by rising inflation. Therefore, in real terms, countries that have cash increased the minimum wage have only ever temporarily increased it.

If increases of the minimum wage are maintained over time, this results in long-term effects. Economists have always been concerned that high minimum wages are beneficial to those in work, but comes at the expense of creating jobs.

For example, a café which is forced to pay its staff a high legal wage may have to raise their prices to cover wage costs, putting customers off and reducing the need for staff. A permanent increase could also push the café into investigating automated facilities, moving away from staff. Super-markets and larger retail stores have also replaced many staffed-tills, to self-check outs, reducing their need for staff.

However, a study in 1933 by David Card and Alan Krueger found that New Jersey restaurants actually increased their staff in line with minimum-wage rises. After this research came out, rival economists David Neumark and William Wascher entered debate, using different research methods to prove that minimum wages did affect jobs.

There is still no conclusion as to whether there is a positive or negative affect on employees and jobs; however the argument is now whether it makes a small negative effect or none at all. This information makes higher minimum wages look more electorally popular, as they require no unpleasant tax rises and they do not lock the poorest out of work. This is why we are seeing some align minimum wage with inflation.

However, there are some studies whish suggest a more cautious approach to minimum wages. Isaac Sorkin, of the University of Michigan, suggests that businesses may choose not to go down the route of investing in labour-saving machinery if the minimum-wage affects them less over time, but they may do if the changes are more permanent.

Mr. Sorkin, along with Daniel Aaronson of the Federal Reserve Bank of Chicago and Eric French of University College London, investigated the types of restaurants that close down and start up after a minimum wage rise, which showed that an increase in minimum wage looks like it pushes some restaurants out of business.

Jonathan Meer of Texas A&M University and Jeremy West of the Massachusetts Institute of Technology point out that if an increase affects the rate of growth in employment, rather than the level, then changes would only appear slowly over a period of time. Their studies suggest that an increase of 10%, made permanent by linking it to inflation, could cut job growth by 0.3% a year. The jobs that this study view being affected the most are within people under 25 and without a degree; making it ever harder for this group to find employment.

The evidence thus far may not draw any definite conclusions, but it also points out that there is scepticism as to whether raising the minimum wage is beneficial to employees as a whole. There may be some short term gain, with larger payslips, but it may put strain on the security of jobs with businesses having to find the extra capital to cover the rising staff bills.


For more information on this subject, click here, to visit The Economist article – ‘Destination unknown’


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