There has been fierce debate over the issue of the minimum wage, over whether it should be introduced, and, now that it is exists, whether it serves to help or hinder those that it is in place to protect. Minimum wage is currently set as i?? 3. 60 per hour for 18-21 year olds and i?? 4. 20 per hour for 22 year olds a 40p increase since it was first introduced in April 1999. The UK introduced the National Minimum Wage in order to assist a number of individuals who were being exploited.
A decrease in Trade Union power over the last decade due to increases in individualism, and greater flexible and part time work has meant that there is less collective bargaining. This has led to an increased chance of low pay and exploitation by employers. There is evidence to show that those in the lowest paying business sectors such as restaurants, hotels and the retail trade are those which have very low union representation (Low Pay Commission 1998). Other Information taken from the Labour Force Survey in 1997 showed that many groups were more likely to be exploited and underpaid than others.
The data showed that 25 percent of part time workers were earning less than i?? 3. 50 per hour compared with just 7 percent of full time workers. The National Advisory Council for the Employment of People with Disabilities (NACEPD) found that 13 percent of disabled workers were paid less than i?? 3. 00 per hour compared with 8 percent of non-disabled workers. A minimum wage should ensure that these groups are less likely to be discriminated against, as nearly all workers in these categories would be entitled to a pay rise.
However perhaps the minimum wage does not need to be set so high in order to prevent exploitation. The United States, which is the world's largest and most dynamic economy, has always had a minimum wage, but set at a lower level. So although nobody wants to earn the minimum wage it does provide a backstop against exploitation whilst lessening the risk of involuntary unemployment amongst these groups. As Professor G Bain (1997) said, "A National Minimum Wage must address the worst cases of exploitation… there needs to be a real incentive to make work pay, without unnecessarily jeopardising job opportunities"
In the 20 years before the introduction of the National Minimum Wage there was an increase in the inequality of earnings in the UK. The reasons being that those earning median wages and those whose hourly rates fell within the top 10 percent (the highest decile) had a greater increase in their earnings than those in the lowest decile. This led to in-work poverty and increased dependence on social security benefits in order to supplement low wages (Low Pay Commission 1998). If the National Minimum Wage remains at a constant rate then the chasm between the rich and the poor will continue to grow.
The reason for this is that pay increases are normally based on percentages of earnings, meaning that the higher paid will always receive a greater amount of money even if everyone was given a 5 percent pay increase. If the concept of a minimum wage which could increase more regularly was introduced then this may help to correct this imbalance. A major problem caused by minimum wage legislation may be that of involuntary unemployment amongst lower paid workers, therefore harming those it aims to assist.
Minimum wage needs to be set at a level where there can be free market equilibrium (i. e.where demand for workers, meets the supply of available and willing workers). If minimum wage is set lower than this equilibrium then there will be an excess labour demand as businesses will want to recruit workers as it will cost them less. However as there are plenty of jobs available, workers are likely to only work for those businesses offering the highest wage, hence the minimum wage will gradually be pushed back up to equilibrium. Alternatively if the minimum wage is set above the free market equilibrium wage, then there will be an excess labour supply because businesses are less willing to employ workers at this rate.
This will therefore lead to involuntary unemployment. "Workers are involuntary unemployed if they are prepared to work at the going wage rate but cannot find jobs" (Begg et al 2000). Although the Low pay commission claimed soon after introducing the minimum wage in 1999 that there had been no measurable impact on overall employment, the minimum wage was introduced during a boom time for the economy when there were plenty of jobs available and both manufacturing and service industries were doing well and feeling confident about the future.
Then speculation that a minimum wage might lead to job losses proved to be unfounded. However this can only be really judged properly over a full UK business cycle because recessions as well as booms need to be taken into account. At present, the outlook for the economy isn't promising, there are fewer jobs around as evidenced by a steep decline in the size of recruitment sections in national newspapers. The manufacturing industry is having a tough time and surveys indicate that businesses are generally more pessimistic about the prospects than at any time in the last five years.
(Mori 2002). The Chancellor Gordon Brown also put out the same message in his pre budget speech earlier this week. It will therefore be interesting to see what effect the minimum wage will have when the economy is in decline. It may mean that companies will be less willing to take on new staff and will also be more ready to lay off existing staff because their wage bill is now much higher. Before the introduction of the National Minimum Wage, low pay was prevalent among young people encouraging them to stay in education or training.
This was beneficial to the country, as it should have led to a better educated and more highly skilled workforce. However although the minimum wage aims to assist young people, it may encourage more 18 year olds to enter employment which may not be best for the UK workforce or for them as individuals, as training would improve their ability to command higher pay. Fortunately the minimum wage does not yet apply to 16 and 17 year olds, as this would cause possible damage to their future employment prospects by encouraging them to enter the labour market without necessary education and training.