Impact of minimum wages Flashcards
Minimum wage
A legally enforced pay floor in the labour market/lowest remuneration employers can legally pay their workers/price floor below which workers may not sell their labour. Employers cannot pay below the hourly minimum wage rate for employees of a certain age, and there are fines for non-compliance. The UK National Minimum Wage sets minimum hourly rates of pay, which are updated annually.
Low Pay Commission purpose
The Low Pay Commission in the UK oversees researching at what level a minimum wage should be set
Without a minimum wage:
There were low living standards - poverty wages
High crime rates(due to people having very little money)
High inequalities
Why does a minimum wage cause the supply of labour to expand?
The supply of labour will expand, as more people are attracted to work at the higher legal pay floor
Headhunted employees
Employees with a high MRPL and inelastic demand curve e.g. successful football managers, don’t need to look for work
Arugments in support of a minimum wage
Poverty reduction: can lead to a more equitable distribution of income within a society
Boosting consumer spending:When low wage workers receive higher wages, they have more disposable income to spend on goods and services
Reducing reliance on state welfare: When workers earn a living wage, they are less likely to rely on income support and other benefits.
Encouraging workforce participation: A minimum wage can incentivize more people to enter or remain in the workforce.
Efficiency wages: Offering a better rate of pay can improve morale and increase labour productivity
Disadvantages of a minimum wage
Job losses: Employers, especially small businesses with tight profit margins, may respond to higher labour costs by reducing their workforce, cutting hours, or automating tasks(however, unemployment rates have overall gone down after a minimum wage).
Higher prices: Businesses may pass increased labour costs on to consumers by raising prices for goods and services. This can lead to rising cost-push inflation and a fall in real income(but inflation hasn’t necessarily rocketed in UK(3% in February 2025, compared to around 25% in 1975)).
Small business struggles: Small businesses may face challenges in adjusting to higher labour costs(currently in the UK, as of 2025, this isn’t necessarily the case). They may have limited resources and may find it difficult to absorb the increased expenses associated with a higher minimum wage.
Fall in investment: If a minimum wage causes higher costs and lower profits, this might have a negative effect on planned business investment. Dynamic efficiency will suffer
Monopsonist-
A major buyer/employer of a particular type of labour in a particular industry
Minimum wages - Inequality
Minimum wages tend to support low-income earners the most, which benefits low skill individuals who are most likely to be exploited in the labour market, however, by increasing wages of the lowest paid, you also have to increase those just above in order to maintain pay differentiation for different levels of responsibility.
Minimum wage - regional differences
The minimum wage doesn’t reflect how cost of living is very different across the country(median rent is £450 in the North East compared to £1375 in London, according to old data).
Living wage
The minimum income necessary for a worker to meet their basic needs, including food, housing, and other essential needs such as clothing.
Trade unions
An organised association of workers in a trade, group of trades, or professions, formed to protect and further their rights and interests.
One worker against a large employer is weak and has no power(individual bargaining).
Whereas, many workers joined together become powerful and their voice is heard(collective bargaining).
Roles of a trade union
Negotiate/bargain high wages: this could cause real wage unemployment due to increased cost push inflation(collective bargaining)
Negotiate working conditions- worker representation including health and safety at work
Pay bargaining(real wages)
Protecting pension rights
Insisting on minimum qualifications and trainings(the BMA ensures all doctors are qualified)
Support the worker when battling against employers
Lobbying for improved minimum wages and workplace training funding.
Campaigns on discrimination
Keynesian arguments
Labour demand is unlikely to remain unchanged:
With higher wages, firms have more incentive to improve the productivity of workers: Efficiency Wage Theory
There may also be growth in the market, with derived demand causing demand for labour to increase anyway.
Economic recession
If the economy doesn’t grow for 2 consecutive quarters(six consecutive months)
Economic depression
If an economic recession lasts for longer than six months(e.g. eight months, ten months), then there’s economic depression
Economic recession impacts
Reduced consumption of goods and services, unemployment, decreased profits, increased inflation
Trade union impact
- Wages rise
- Employment rise(as long as wages aren’t increased above the level of MC= MRP curve)
UK laws to protect workers
Angela Rayner has recently introduced laws to protect workers - Employment Rights Bill(to boost productivity for British workers and grow the economy e.g. sick pay from day one of employment, she’s fighting for a 4-day working week, no more hire and rehire rules, no zero hours contracts
However, the first thing Margaret Thatcher did was try and weaken the power of trade unions: making it more difficult for people to go on strike(only calling members of stroke after balloting them)
Real wages
Wages in line with the rate of inflation
Trade union role - collective bargaining
Unions negotiate with employers to secure better wages and benefits for their members
They advocate for improved working conditions, such as safer workplaces
Unions negotiate employment contracts that outline the terms and conditions of employment for their members
Trade union role - worker representation
Grievance handling: They help workers address grievances, resolve workplace conflicts, and enforce employment rights.
Legal Support: Unions provide legal assistance to members facing discrimination, wrongful termination, or other workplace issues
Following trade union membership in the UK
Economic changes: The shift from manufacturing to a service-based economy in the UK has led to a decline in traditionally unionized industries.
Legal changes - The UK has implemented various labour laws and reforms over the years that have made it more difficult for unions to recruit and maintain members e.g.
laws that require a minimum level of support before strike action can occur and restrictions on picketing have limited the effectiveness of union activities.
Changing workforce demographics: The composition of the workforce has changed, with more part time, temporary and gig economy jobs. These types of jobs often have less job security and fewer benefits, making it challenging for unions to organize and retain members.
Trade union density
Proportion/percentage of workers in a particular workforce or labour market who are members of a trade union
Trade union wage premium
The additional income or wage advantage that workers who are members of a trade union typically earn compared to non-unionized workers in similar jobs or industries
Factors behind rise of the gig economy
Technological advancements: Advances in technology(particularly the
proliferation of smartphones and the growth of internet connectivity), have made it easier for workers to find gig work through online platforms and apps.
Cost reduction for employers: Employers in the gig economy often benefit from cost savings. They can avoid expenses associated with hiring full-time employees, such as providing benefits, office space and training.
Desire for work life balance: Many individuals are drawn to gig work, because it offers greater control over their work schedules.
Entrepreneurial opportunities: Gig work can provide opportunities for entrepreneurship. Workers can become self-employed and offer their services directly to clients or customers.
Zero-hour contracts
Employment agreements in which an employer does not guarantee a minimum number of working hours to an employee.
Instead, the employer calls in the worker on an “as needed” basis, typically with short notice, and pays the worker only for the hours worked.
These contracts are characterised by their lack of fixed working hours on the absence of an obligation on the employer’s part to provide regular work or a stable income.
Reasons for the long run decline in UK trade union membership
1) Structural change in employment from heavy manufacturing and large public sector employment to a more flexible labour market dominated by services where unionisation rates are much lower.
2) Globalisation and flexible hiring - many multinationals make it harder for trade unions to organise. The rise of the gig economy has lead to a rise in contingent, non-contracted, self-employed workers - most of whom are not TU members.
Factors that affect trade union bargaining power in the labour market
- Union density and membership:
Higher union density provides unions with more negotiating leverage. This links to the credible threat of strike power and the commercial effects of strikes. - Economic climate: In times of rapid GDP growth, falling unemployment, and skilled labour shortages, unions may have greater bargaining power due to the scarcity of skilled workers.
