The minimum wage has been a contentious issue in most countries in the world. There are proponents and antagonists for the issue and many concerns have been raised about the benefits and pitfalls of each argument. In the United Kingdom, the government and bodies such as Low Pay Commission (LPC) yearly review the rates of minimum wages. As of 2018, the minimum wage in the UK was set at 7.83 for adults above the age of 25 and it reduces with age. Minimum wage correlates to unemployment and therefore an essential element to be considered before creating policies or decisions regarding an increase or decrease in the minimum wage. The review of the minimum wage is essential but other elements of the economy should be considered to ensure minimum wage does not affect the rate of employment in the UK.
From a classical analysis, what is the impact of a minimum or living wage on unemployment?
One of the impacts is an increase in minimum wage can result in an increase in the rate of unemployment. The marginal product of labour highly determines the labour demand and its sensitivity will have an impact on the prevailing wage (Schmitt, 2013, p.5). That will mean, when there in inelasticity in the demand for labour and there is an increase in the minimum wage, there will be a reduction in employment. An increase in the minimum wage causes the cost of doing business to increase. Being in a competitive space, the business will need to find a viable option to reduce the cost and avoid transferring the increased cost to the consumers. One viable option will be to reduce the number of employees in order to increase the minimum wage of the available employees. Another viable option is the company will be forced not to hire any more employees for a certain period until more profits are achieved. That will increase the rate of unemployment as businesses will be forced to reduce their employees and the demand for employees will reduce. Additionally, unemployment is low once the supply of labour is inelastic and vice versa. Therefore, the minimum wage has an impact on the rate of employment.
The second impact is an increase in the minimum wage reduces the consumer spending. Increasing the wages of low-income earners reduces the consumer spending since workers are never consumers. According to (MaCurdy, 2015, p.498), increasing the minimum wage results to an effect on the value-added tax and hence consumer prices and that is regressive. An increase in the VAT will cause an increase in the cost of consumer products and that will have a negative effect on other aspects of the economy. When there is a reduction in consumer spending, businesses will not be able to achieve an increase in profitability and the result will be reducing the number of employees or a decrease in employment opportunities. There will be a shift in the supply curve and the employees will end up being affected by an increase in minimum wage. The increase may also prompt other employees who have a higher pay to demand an increase in their pay and they offer more value as compared to low-income earners. The result will be an increase in the cost of living as consumer goods will increase and all the economic activities will end up being affected. Therefore, minimum wage affects consumer spending which in turn will affect the rate of employment.
Another impact of minimum wages is on the equilibrium in the output market. An increase or decrease in the minimum wage will have an impact on the demand curve and that will take place until an equilibrium is reached. Any fluctuation in the economic market has real consequences on the market economies and the impact will be endured on employment rather than on real wage flexibility (Rotheim, 2013, p.63). The margins of profits for the employer will reduce as a result of an increase in minimum wage as well as the cost of doing business. To prevent the cost from affecting the profits on the business, the employer will be forced to pass the increased cost to the consumer. The demand for products will reduce the cost will increase and that will have an adverse effect on the business as well as employment. Therefore, when the demand is elastic, employment decreases will be larger and vice versa when demand is inelastic. The output market highly determines the elasticity of demand and profitability in a business and thus important to be considered before increasing or decreasing the minimum wage. Such aspects will affect decision making on elements such as minimum wage and the impact it will have on the overall economy.
What are the counterarguments against this?
One of the counterargument is there is a need to shape the economy to ensure an increase in economic growth and productivity. (Neumark, 2014, p.609) states that there is no evidence to back the assertion that increasing the minimum wage will lead to job losses for other people. One critical point he raises is that the economy needs to be shaped to ensure it becomes sustainable and for all the stakeholders to benefit. The claim is true as looking at it in an economic view, the minimum wage will not affect the export industry. Most countries depend on the import and export industry to ensure sustainability and achieve growth in the economy. The minimum wage will barely have an impact on the import and export business and therefore not sensible that it will lead to unemployment. After all, the minimum wage will be generated from the profits and as such, it will not lead to an increase in the price of goods and services in the market. Raising the minimum wage thus will not lead to employment and to the contrary, it will lead to economic development as employees will become motivated and more productive and thus end up creating employment opportunities for other people. The counterargument thus is correct and the labour market will not be affected.
The second counterargument is an increase in minimum wage increases the spending of most consumers. Based on an argument by (De Vries, 2013, p.121), the spending power of the consumer is dependent on their economic condition. The claim can be correct as a rise in the minimum wage will help to improve the living standards of the employees and their families. With the purchasing power accorded to the employees earning minimum wages, they are going to afford some of the basic and other human needs. That will mean the resources will go back to the economy and they will be used to improve the economic condition of a country. There will be increased demand for goods and services as more people will be able to afford some of the basic commodities. Growth in other sectors of the economy due to increase in demand will create employment opportunities for other people, therefore, the minimum wage will have an impact on unemployment. Though in my view, for the argument by De Vries to be economically viable, aspects such as inflation and taxation should not be increased as the employee will not benefit from the minimum wage and it would be a negative impact on the employment.
Another counterargument is an increase in the minimum wage causes an increase in performance of most employees. According to an argument by (Zeng, 2017, p.579), an increase in minimum wage results for a win-win situation for the employer and the employee. The productivity of the employees is determined by the value they get at the end of the day. Motivation is one of the factors that affect the productivity and performance of the employees. Based on the argument presented by Zeng, an increase in minimum wage will benefit the employees. Salary is a great factor that determines the commitment and output of an individual and they can make an organization to either benefit or be affected. Businesses thus will benefit and the impact will be a reduction in the cost of doing business and more profits for an employer. Not only will the input increase, but there will be a downward shift in the supply curve and that will ensure the workers will not be affected by an increase in minimum wage. An equilibrium will be reached as a result of movement in the demand curve. Businesses will not be forced to transfer the cost to the consumer hence the output market will not be affected making the employer and the employees to benefit.
Is it possible for a minimum wage to reduce unemployment rates?
Yes, it is possible for minimum wage to reduce the unemployment rate. One of the reasons to support this claim is minimum wage can lead to increased economic activities. It can stimulate economic growth as more resources will be available that will lead to an increase in the supply of labour. Wage moderation will make the economy stable, increase productivity and ensure the development of a more dynamic economic system (Lavoie, 2013, p.21). An increase in the economic activities will ensure more employment activities will be available and since the cost of employing people will be cheap, the rate of unemployment will reduce. When more people will have access to employment opportunities, the demand for goods and services will increase and economic growth will be achieved. Stability in the economic market helps to ensure more opportunities will be available and that will have an impact on the rate of unemployment.
The second reason to support this claim is employers will be able to afford to hire more people. With minimum wage, employers will be able to afford to hire more people. In a study of the impact of the increase of minimum wage, (Hirsch, 2015, p.207) established that it leads to an adjustment in the channels of wage increase as well as other non-labour costs including profits and performance standards. The marginal product of labour highly determines the labour demand and its sensitivity will have an impact on the prevailing wage. Therefore, an elasticity in the demand for labour will lead to an increase in the rate of employment. The employers control the labour market and when there is increase economic activities, they will increase the people they hire as it will be viable for the businesses hence minimum wage can reduce the rate of unemployment.
Another reason to support this claim is it will lead to increased spending by the people. When employers can afford to employ more people, the demand for goods and services will increase. The ripple effect is it will lead to growth in the economic activities hence more employment activities for the people. When the spending power of the people will increase, the businesses will benefit and as a result even and increase the amount of minimum wage will not affect the rate of employment. Most importantly, it is essential to consider that most employers hire people based on demand and the profitability the businesses achieves. An increase in demand for products and services will make the businesses to flourish and be able to afford to pay the minimum wages, the rate of unemployment will reduce.
Conclusion
There may be disagreement on the issue of the minimum wage on unemployment and one thing is for sure, a low increase in the minimum wage have small if any adverse effect on employment. Issues on minimum wage in the UK began in 1999 and most of the research done indicates that minimum wage does not lead to an increase in the rate of unemployment. With the government and the Low Pay Commission in place, more research should be expected in this area and how it will impact the economy and the rate of employment. Also, more argument should be expected on the impact of the minimum wage of the rate of employment as new research continues to be conducted every now and then and both the proponents and those against the issue continue to raise new ideas. Either way one looks at the issue, it's certain that minimum wage in one way or another has an impact on the rate of unemployment.
References
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