With the announcement of the Chancellor’s 2021 budget, the minimum wage is set to increase from £8.91 to £9.50, an increase of 6.6%, and the government says full-time workers will gain an extra £1,000 a year.
I am sure that all proponents of an increase in the minimum wage are well-intentioned, principled and sincere, however, much research shows that increases in minimum wages tend to actually increase unemployment and hurt low-skilled workers the most. Businesses tend to either respond to the increased costs by reducing employment, particularly for low-skilled workers, or they pass the greater costs on to customers. Moreover, any increase in the minimum wage is merely artificial, as no real increase in productivity is guaranteed or mutually negotiated between employer and employee. Namely, increases in the minimum wage are both artificially raising costs with no increase in production, while also infringing on economic liberty and the ability for employees to negotiate wages that suit their needs and skill levels.
Before delving into research papers, perhaps it is beneficial to consider the most simplistic explanation on the effects of minimum wage increases to the quantity of labour demanded, taught in many Econ 101 classes.
Consider the demand and supply curve for labour shown in the diagram above. Suppose the wage where labour supply meets labour demand is Wc, the market-clearing wage rate, and the quantity of employment demanded is Ec. However, when the minimum wage is introduced, wages cannot be less than Wm. Therefore, the quantity of labour demanded decreases to Em.
However, despite the above example, the reality is rarely as simplistic and relatable to basic economic models, and an immense amount of research in more than one hundred countries has been conducted to empirically determine the effect of minimum wage legislation.
The book “Minimum Wages” by David Neumark and William L. Wascher is one major source of evidence that shows the consequences of minimum wage legislature by looking at empirical data over many decades and countries. Summarised as “A comprehensive review of evidence on the effect of minimum wages on employment, skills, wage and income distributions, and longer-term labour market outcomes concludes that the minimum wage is not a good policy tool”, Neumark and Wascher use both the synthesis of nearly two decades of their own research and other research that touches on similar questions to argue that minimum wages do not achieve the desired goals set forth by their supporters. Highlighting that minimum wages reduce employment opportunities for less-skilled workers and lead to reductions in their earnings, Neumark and Wascher argue that there are longer-term adverse effects on wages and earnings; partly by reducing the acquisition of human capital. The authors instead encourage policymakers to look for other tools to raise wages for low-skilled workers and provide the poorest with an acceptable standard of living.
Moreover, in 2014, Neumark and Wascher along with economist J.M Ian Salas concluded: “that the evidence still shows that minimum wages pose a tradeoff of higher wages for some against job losses for others and that policymakers need to bear this tradeoff in mind when making decisions about the increasing the minimum wage.”
There are also many more studies indicating the detrimental consequences of minimum wage legislation, such as: “The Negative Effects of Minimum Wage Laws” by Mark Wilson and a 2012 analysis of the New York State minimum wage increase from $5.15 to $6.75 per hour found a “20.2 to 21.8 per cent reduction in the employment of younger less-educated individuals.”
After the recent budget and the announcement of rises to the minimum wage next year, employers are already signalling the negative effects of such a burden. The Federation of Independent Retailers, representing 11,000 small businesses nationwide, has said that raising the wage will place even more pressure on small businesses. After Covid has already forced many businesses to cut staff and hours, this latest move will only worsen the problem. The president of the NFRN, Narinder Randhawa, has also said: “given that many of the items on sale in our 11,000 members’ stores- particularly newspapers and magazines- are price marked, retailers, are unable to increase their prices to cover these additional payrolls costs.” Mr Randhawa also said, “At a time when small businesses need help and support more than ever this move by the government feels like a kick in the teeth for those who are already struggling to survive.”
Once again, the Conservative party can be seen as a party that often neglects smaller businesses while forgetting the interests of the local high street and the community as a whole. Young people, often with the lowest skills, need entry levels jobs to build experience and gain new skills. Minimum wage increases will only make this more difficult and dissuade businesses from employing those young entry-level workers. Higher wages need to come from higher productivity, not at the whim of a magic wand. Increasing the quality of labour, investing more in education, investing in capital and the quantity of capital; innovation. These are policies that would encourage genuine higher wages and allow the poorest within society to improve their standard of living.
Finally, I have one more objection to minimum wages from a moral perspective. Why should it be the duty of the state to interfere with the mutual negotiations between two parties, when neither is coercive towards the other and with no externalities involved? As long as a competitive market exists, all that minimum wages do is set arbitrary wage levels, interfering with the liberty of employers and employees to mutually agree to a wage that suits the skill level of the employee while also matching the productivity that one can give.
Thomas Sowell, the fantastic economist who has written great works such as “Knowledge and Decisions” and “Basic Economics” sums minimum wages perfectly: “The minimum wage law very cleverly is misnamed. The real minimum wage is zero. That is what many inexperienced and low skilled people receive as a result of legislation that makes it illegal to pay them what they are currently worth to an employer.” Workers compete against other workers (not employers) to find jobs and get the highest wages. Employers compete against other employers to find the best workers. In other words, low-skilled workers compete against high-skilled workers in the labour market. Low-skilled workers who would be employable at a low wage become unemployable at an artificially higher wage. And that explains the perverse cruelty of minimum wage laws: it inflicts the greatest harm on the very workers it is allegedly designed to help.
To give everyone a much-needed dose of wisdom from Milton Friedman: “The minimum wage destroys the best kind of training programs we’ve ever had: on-the-job training. The main way people have risen in the labour force is by getting unskilled jobs and learning things……. In an attempt to repair the damage that the minimum wage has done to traditional on-the-job training, you now have a whole collection of programs designed to take up the slack.”
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