Debate: should we scrap the minimum wage?
As new research shows that job cuts are hitting the lowest paid hardest, we ask: is the minimum wage helping or hindering UK workers?
With unemployment on the rise and new research showing that low-paid workers are being hardest hit by job cuts, the question of how Britain can create new jobs in a stagnant economy is probably the biggest facing the coalition government at present.
As a result, the minimum wage - previously hailed as a triumph of the previous Labour government - has faced small but growing criticism since the coalition took power.
So does it offer much-needed protection to British families, or is the minimum wage simply preventing employers from offering more people work? We asked experts from two leading thinktanks to give their views.
'Why the minimum wage should be scrapped'
By Sam Bowman, head of research at the Adam Smith Institute
Too many politicians have failed to realise that they cannot change the laws of economics any more than they can ban gravity. The national minimum wage (NMW) is one example of this failure.
First introduced by the Blair government, it sets a wage floor under which no person can be employed. The hope was that this would create higher wages for the people at the bottom.
The reality was that it priced people out of work - economic reality trumped political rhetoric. The outcome has been record levels of unemployment among young people, who are most vulnerable to the joblessness that minimum wage laws help to create.
Wages are a function of productivity
What happened? Wages are a function of productivity. Employers want the best employees for the least money, and employees want the most money for the least work. If there was only one employer in the world, they could set wages at whatever they want. But once there are several employers in a marketplace, they have to compete to attract workers to work for them rather than their rivals. That causes a bidding war where wages for jobs rise to roughly correspond to what they are worth in productivity terms - just enough for the firm to make a small profit.
Wages correspond to productivity, but what about those whose productivity is low enough that they fall below the NMW floor? They are priced out of work altogether. Take the example of a supermarket, looking to hire a tenth checkout worker. This extra checkout worker might make the employer the equivalent of £5.50/hour - even if the calculation is imprecise, they usually have a rough idea of the numbers involved.
But with the NMW in place, hiring this person becomes unprofitable: at the current NMW level, they would be losing 58 pence an hour by hiring the extra worker. No firm can do that and hope to survive.
Instead, the job isn't created, the firm loses out and there is one more person in the dole queue who doesn't need to be there. The NMW cannot make people more productive, but it does put people out of work.
Those at the bottom worst hit
The worst-hit people are the ones at the bottom of society - especially young people who lack work experience. Tragically, the NMW prevents them from getting their foot on the ladder, working badly-paid jobs to gain the experience they need.
Economists studying this relationship have estimated that a 10% rise in the minimum wage level causes a 1-3% rise in youth unemployment. With Britain's youth unemployment levels at an all-time high of 19%, it's time for the government to abolish the minimum wage.
'The need for a minimum wage and much more'
By Dr Faiza Shaheen, senior researcher on economic inequality at the New Economics Foundation
A minimum wage ensures a decent pay floor. It means that the market cannot drive wages down to a level where people cannot sustain basic living. After all, what's the point of working when it doesn't even give you enough money to sufficiently feed and clothe your family?
At the end of September, the minimum wage went up to £6.08 from £5.93. Some businesses are complaining that this is too high, especially at a time when many retailers are struggling. However, at 35 hours per week this wage amounts to around £200 a week, or just under £10,000 a year once you take into account tax and national insurance contributions.
With this wage packet you would have to pay your bills, including rent and mobile phone, as well as for food, clothing and transport. Don't forget some light entertainment and squeezing out some savings for a rainy day, or perhaps a holiday. You do the sums.
Yes, there might be some help from the government in the form of tax credits, but surviving on this much money is still a stretch, especially if you have children.
No wonder one in 10 of the poorest fifth of households are behind with at least two bills.
Calls for a 'living wage'
For this reason, community groups, such as London Citizens, have been campaigning for a 'living wage'. A living wage is specific to a place - for example in London, where living and transport costs exceed other parts of the country, it is set at £8.30. This figure is calculated to ensure that people can access the goods and services that the average person in the UK believes to be essential for a decent life. Recent research showed that one in five of the UK working population is paid below a living wage.
So far, there has been little evidence to show that the minimum wage is destroying jobs, leading many to conclude it could be pushed higher. If businesses really cannot afford to pay even the basic minimum wage, then rather than lowering or abolishing the minimum wage, we should ask why it is that our economy is producing jobs that condemn our working citizens to poverty.
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