3.3 Workers

Again your textbook is an excellent reference point, but also use the resources below.  

1. Student Activity: Link the jobs with the wages

The Labour market in a mixed Economy: Government intervention and Minimum Wage legislation and the effects of Trade Unions

Minimum wage theory 

The minimum wage is a pay floor. Employers are not allowed to pay their employees a rate below the minimum wage. This only has an effect if the minimum wage set is above the equilibrium wage rate that would otherwise exist in the labour market.

In the diagram above, you can see that the wage floor of 3.60 is below the equilibrium wage rate. In this example, the NMW has absolutely no effect on that equilibrium.

The industries that do tend to be affected in the UK are hospitality (a third of the workforce affected); security and cleaning (30% affected) and agriculture, retailing and social care (all 20%, figures from the Labour Force Survey). 

The case for the National Minimum Wage

1. Reducing poverty: Unsurprisingly, households whose earners were paid less than the NMW also tended to be those who were officially defined as 'in poverty' (income of less than half median earnings). It was felt that the NMW would lift households out of poverty. Of course, this leads to another advantage of the NMW; it should, therefore, lead to a fairer distribution of income.

2. The effect on productivity: Some economists believe that the increased wage might improve labour productivity. Workers may respond to their higher wage rate by working harder, possibly as a result of worrying about losing their job now that the increased wage rate has made it a more 'sought after' job. Employers may force through productivity improvements. They may feel that the increased wage rate needs to be earned through increased efforts! If the workers are producing more, unemployment may not need to increase due to minimum wage legislation

3. The labour market is not efficient and employers have too much power to exploit workers. The minimum wage stops firms from exploiting workers.

The case against the National Minimum Wage

1. Unemployment: We have already seen how a NMW can cause unemployment. It is easy to see this in the labour market diagram. How will workers respond to the higher wages? If their efficiency/productivity increases, then unemployment may not occur. (point 2 above)

2. Are those in poverty wage earners? One of the main advantages of the NMW was its success in reducing poverty by increasing the wage of low-income families. But many households in poverty are struggling precisely because no one in the household has a job. The NMW is useless to the unemployed.

3. High cost to employers: The time/bureaucracy involved in complying with the new law, plus the actual cost of the higher wage (assuming productivity improvements are not significant) may force firms to increase the price of their products, which is detrimental to consumers. However if profits are high (say in a boom ) firms can increase wages without increasing prices by simply reducing their profits. Amazon is a good example of where this may be possible

It depends upon.....

• Can firms afford the increased wages- if the economy is strong/if profits are high, then higher minimum wages is a good thing, although shareholders may disagree.

• Will it reduce the international competitiveness of the country? Indonesia has seen increased minimum wages, which may mean MNCs look elsewhere in Asia to produce their goods.

• Is inflation already high? If so it could further worsen inflation.

• How bad is inequality in the country? This is a subjective issue and there is no correct answer. However it is important to realise that MWL can be used to reduce inequality in society and attempt to make sure that all benefit from a booming economy.

Student task: Research the National Minimum wage in Indonesia and minimum wages in Jakarta. How do these differ from your home country?

https://www.gov.uk/national-minimum-wage-rates

Indonesia

Thailand