In regards to jobs, after the 2008 financial crisis which causes only a small increase on the unemployment rate in the United Kingdom, the unemployment rate has dropped significantly from 8.5% to 4.3% between the year 2011 and 2017 (D’Arcy, 2017). Despite the resilience of employment had given a pleasant surprise to numerous economists, the nominal wage growth of U.K. remained both disappointment and underwhelming. It has not been increased since the financial crisis which ended in the year 2014. Therefore, the U.K. Chancellor has decided to introduce the National Living wage which schedule to increase the minimum wage to sixty percent of median pay by the year 2020, with the hope to increase the standard of living for the low-income earners.
In the past, the majority of economists will agree that an increase in the minimum wage will inexorably cause a considerable amount of people to lose their jobs. As the majority of them agree on the basic principle of economics that the demand falls as wages rise (Manning, 2014). With regard to the labour under perfect competitive model demand, the companies have no control of the wage, thus they are the wage takers, if the government is pushing the minimum wage higher than the market wage, the minimum wage will reduce and affect the employment. As based on the labour demand and supply curve, with higher wages than the equilibrium wage, companies demand workers will decrease, on the other hand, the labour supply increase as the number of people who want to join in the labour market grows due to attractive wages. As companies are unable to sustain high labour cost which will reduce the number of jobs in the labour market and this causes the labour market turns into disequilibrium. There will be a gap of unemployment between the demand and supply curve. On the other hand, when the wage is low, the demand for the labour is high, firms will able to create jobs as their profits are high. This causes labour supply to be high, people will find jobs easily and the unemployment rate will be low.
With regards to labour demand under the monopsony model, the cost of having an extra employee equals to the value of that person’s output and the intersection of the marginal product of labour and the marginal cost of labour will be the employment level (Rocheteau & Tasci, 2007). The firms have market power, thus they are the wage setters. They are able to set cheaper wages that maximise its profits. It means that there are still scope to push up wages. Moreover, the monopsony firms are unlike firms from the competitive model, they are not able to hire as many workers as they want at a constant wage. If the U.K. government sets a minimum wage which higher than the initial monopsony’s wage, the marginal cost of labour curve will flatten until it intersects with the labour supply curve in the monopsony graph. This will oblige monopsony firms to employ workers with the minimum wage as they can still afford to do so, considering that the marginal product is still higher than the minimum wage and hence increasing the employment. However, if the government is pushing the minimum wage too high, it may cause employment to drop.
However, these theories may not be able to apply on the current situation as it doesn’t include the elements of reality.
Businesses and employers tend to perceive a rise in minimum wage in a negative way as they assume that this may cause their profit to drop and may even drive them out of business. As most of them have overestimated their total labour costs after minimum wage has increased, however in many instances it is smaller than the numbers suggested (Manning, 2014). They wanted to pass a rise in minimum wage to their consumers but afraid that this may bring disadvantage to them due to the price war in a competitive market. However, they are assuming that they are the only one that will suffer from the cost inflation and in reality, their competitors will also increase their prices due to the minimum wage increase. Furthermore, the effect fall of sales tends to be minimum as consumers will not able to compare prices from different companies when all the companies have increased their price and small changes in pricing will not make a huge impact on the perception of consumers of the things they need and wanted to buy.
A decrease of 0.4 percent for the first five months of 2017 in UK’s wage growth after adjusting for inflation has caused people to suffer from lacking spending power (Bruce & Schomberg, 2017). With dropping consumer spending power, retailers will see lesser profit from their sales and it may be a bad sign for the UK’s economy. Consequently, a significant increase of minimum wage by 2020 with the expectation that the wage growth will exceed the inflation rate in the same period of time, will optimistically increase the real income and standard of living of 3.8 million people in the United Kingdom (Nargrove, 2015). Hence, the consumer spending power will increase and may even boost the economy.
In addition, after minimum wage is increased, the low-paying jobs will become more attractive, employees will work harder and will not want to lose their well-paid jobs. The labour turnover rate and absenteeism will decrease (Manning, 2014). This will definitely bring positive benefits to employers as for when employees work harder, sales will tend to increase and companies profit will rise. Companies will most likely not have massive layoffs with their employees to cut cost as the minimum wage has increase employees productivity. An empirical evidence on productivity conducted by Marian Rizhou and Richard Croucher shows that the total factor productivity has improved up to 11 percent in large companies and security services companies in U.K. have benefited the most from the increase of minimum wage which the companies productivity have gained of around 25 percent (Croucher, Rizhou & Lange, 2017). Thus, the gain in the total factor of productivity for UK’s low paying sectors from minimum wage has made positive employment impact in the past few years. Based on the past year’s evidence, this indicates that the further gain on the productivity for UK’s labour force will be the likely effect after the minimum wage is increased by 2020.
Although some companies in the lower productivity sectors will have a higher labour cost due to minimum wage and employment will be affected, this does not certainly mean that total employment of the country will decrease, as higher wages may attract more people in the labour market. For example, the resolution foundation report on low pay Britain cited a study by Conor D’Arcy in 2017, shows that despite the hairdressing industry in U.K. has 19 percent decrease in employment after the minimum wage was increased from 6.70 to 7.50 pounds an hour between the year 2015 to 2017, the textiles and clothing industry brought 31 percent growth in employment (D’Arcy, 2017). The overall employment rate in low-paying occupations has increased by one percent in the same period of time (D’Arcy, 2017). This indicates that an increase in minimum wage will bring marginal improvement on employment in the low paying industries. In addition, a data by Bruce Kaufman and Tatyana Zelenska used data from Georgia’s fast food restaurants and analysed the impact of the increase in the United States federal minimum wages during the year 2007 and 2009 shows that there are evident effects on earnings in low-income regions of Georgia and there are no effects on employment (Manning 2014). Both empirical pieces of evidence show little or no adverse impact on the labour market. Thus, this will be the likely effects of the policy change in 2020.
A report by Howard Reed shows that a 1.50 pound per hour increase of minimum wage will result on gaining 2.1 billion pounds in UK’s public finances after minus the expenditure (Reed, 2014). This extra revenue from taxes for the government may increase public spending on current U.K. government plans such as improving the infrastructure or increasing welfare benefits for the poor. With a significant increase in government spending, this may also create more jobs and boost long-term economic growth.
Last but not least, a chart by Micheal Krassa and Radcliff based on date from Gallup has shown that minimum wage has a direct relationship with the financial wellbeing of people in a number of countries (Krassa & Radcliff, 2015). This means that when the minimum wage increases, the country will most likely have the higher economic wellbeing of its national population. This may tell us that the U.K. will have higher international rank after its minimum wage has risen by 2020.
In conclusion, the minimum wage has a clear impact on employment but has little evidence to prove that it has a negative effect on employment. In spite of this, many economists still don’t agree with the empirical evidence provided as they still believe in economic theories that minimum wage will cause unemployment as demand curves for labour inevitably slope downward. We will only know to ascertain the extent the minimum wage will make a positive impact only after it implements in 2020.