Would raising the minimum wage increase unemployment?

The headlines from the Labour Party conference at the weekend included a suggestion that they wanted to increase the minimum wage, as it had lost value in real terms over the last five years. An increase of 45p an hour was mooted. Ed Miliband seemed to row back from this somewhat on Sunday, floating some nonsense about different minimum wages for different sectors, and talking about increasing fines for employers breaking the minimum wage laws (no one gets fined now, so it’s not clear what increasing the fines would do). Ed Balls then mentioned raising the minimum wage in his speech today, so maybe it is on the cards.

This kind of talk leads to furious whingeing from big business about how raising the minimum wage would increase unemployment. It’s always couched in terms of small businesses being unable to afford to pay higher wages. But do they have a point?

An increase in the minimum wage would increase costs for the minimum wage employer. This may lead them to lay off staff all other things being equal. But all other things are not equal. If wages go up, so do the incomes of their workers. Those workers will be able to buy more stuff which will increase the profits of businesses. If the increase in sales is significant enough, employment might actually rise following an increase in the minimum wage.

But will incomes actually rise? Won’t the increase in wages just be offset by a reduction in payments of tax credits? Well yes. But by no means all minimum wage workers are eligible and/or claim tax credits, so there will still be a positive increase in income at the lower end economy-wide. And if less tax credits are being paid, this creates room for tax cuts, either on individuals (who then have more disposable income) or on businesses (to offset the increased wage bill).

So while it’s possible increasing the minimum wage could increase unemployment, it’s equally, if not more likely that unemployment would be either unchanged, or actually fall as a result.

And if unemployment does rise as a result, is there anything the government could do? Yes, it could strengthen the safety net, by offering a guaranteed, public sector job paying the same wage to those displaced by the increase. This would create a healthy competition for workers, and competition is good right?

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8 thoughts on “Would raising the minimum wage increase unemployment?

  1. All rational studies show that the minimum wage as very little effect on the level of employment – much to the surprise of those steeped in the religion of traditional economics.

    But then the lack of unemployment and consequent apparent drop in productivity through the recession in the UK surprised those that are steeped in the religion of traditional economics.

    The lack of effect on employment is obvious once you get beyond marginalism into what businesses actually do – which is fight for market share. Letting people go means that you can do less – and that means your market share declines.

    What really happens is that they moan like the devil, and then they notice a pick up in trade from the increased demand, and then they produce more stuff to fulfil that demand – increasing the velocity of transactions and generating more profit from the existing workforce.

    Why? Because no business runs flat out. There is always slack in the system that you can reorganise as required to extract extra labour services from the labour hours purchased and go after that extra market share – if it appears. And that’s before the extra demand validates hiring more staff.

    Something that Henry Ford understood in the 1930s – when he introduced the $5 per hour wage.

    Wages are *the* source of profits.

  2. Australia has had a minimum wage of $16 p/h in place for many a year, and it is the only ‘Westernised’ economy to be largely unaffected by the Credit Crunch, while unemployment is far less of an issue there than in the UK or the USA. Objections to a rise in the Minimum Wage on grounds of unemployment or inflation increases are largely scaremongering.

  3. The truth of the matter is that the minimum wage isn’t high enough to empiraclly damage anything. There is absolutely no evidence that the minimum wage reduces poverty or increases employment opportunities. Basically the argument for the minimum wage boils down to “well, we haven’t raised the wage enough to decrease unemployment.”

    There are two types of economists: those who believe in the Law of Demand and those that call themselves economists who don’t believe in the Law of Demand.

  4. A rise the minimum wage may just be offset by lower Tax Credits for many people but lessening govt subsidised low pay is good surely?

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