3.3.3.3  Minimum Wage Policies

(This is an archived extract from the book Patterns of Power: Edition 2)

Minimum wages were introduced to protect people against exploitation and to reduce inequality; they are a form of political regulation of the labour market.  Globalisation has now increased their importance: to limit the extent to which economic immigrants can undercut the wages of existing workers.  These are defensive measures, implemented for social and political reasons, rather than to improve the health of a country’s economy. 

A minimum wage can also help the rest of society if it provides an incentive for people to work rather than claim benefits.  For this to be the case, a person in work must receive more money than someone on welfare, even if they are only working part-time, as illustrated:


This diagram illustrates a number of possible policy decisions:

·      It shows the effect of government welfare payments, as a socio-economic 'right', to those who are without work for whatever reason. 

·      It includes an incentive to work: as people move into part-time work, they become financially better off by doing so.  In other words, the reductions in welfare benefit should only be a proportion of their part-time earnings. Welfare payments vary according to family size and housing costs, but the principles illustrated should always apply. 

·      It illustrates that people who are in full-time work at the minimum wage could pay some tax, if the threshold for paying income tax (or National Insurance in Britain) is set below the minimum wage.  This has the political effect of making the individual aware of government spending as a burden, not just a cost-free entitlement.

·      The diagram includes the earlier illustration of a 20% basic rate of tax and a 40% higher rate, which is progressive taxation (3.2.4.1).

The minimum wage has to be set at an affordable level:

·      If it is set too high, above the equilibrium level of supply and demand for unskilled labour, it will result in unemployment – because some businesses might relocate lower-value tasks to other countries, or buy goods and services, in order to remain competitive. [1] 

·      If the minimum wage is set too low, workers have to claim benefits to supplement their incomes; this is helpful to the employers but it increases government spending.[2]

·      As The Economist noted, “[i]n flexible economies a low minimum wage seems to have little, if any, depressing effect on employment”.[3]

Realism is needed, in relation to the prevailing economic conditions.[4]

© PatternsofPower.org, 2014


[1] Samuelson and Nordhaus described the relationship between the minimum wage and supply and demand in chap. 4, op. cit., pp. 66-67.  The NBER published some empirical data in Working Paper No. 12663, in November 2006, which was available in April 2014 at http://www.nber.org/papers/w12663.

[2] An article, entitled GOP Politician-Turned-Entrepreneur Supports Big Minimum Wage Boost, was published by the Huffington Post on 11 January 2014 and was available then at http://www.huffingtonpost.com/2014/01/11/ron-unz-minimum-wage_n_4582051.html.  It referred to the trade-off between the minimum wage and taxpayer-funded benefits, quoting the views of Ron Unz:

“Ron Unz, a Silicon Valley multimillionaire and registered Republican who once ran for governor and, briefly, U.S. Senate, wants state voters to endorse the wage jump that he predicts would nourish the economy and lift low-paid workers from dependency on food stamps and other assistance bankrolled by taxpayers.”

[3] On 14 December 2013, The Economist published an article entitled The logical floor which explained why, in the absence of a minimum wage, employers could pay less than the market rate because people find it hard to move; the article was available then at http://www.economist.com/node/21591593.

[4] The above Economist article at http://www.economist.com/node/21591593 noted that Britain’s minimum wage, at 47% of median income, “does not seem to have pushed many people out of work”.  France’s minimum wage though, at 60% of median income, has been accompanied by “shockingly high rates of youth unemployment: 26% for 15- to 24-year-olds.”