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Debate: Minimum wage

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Are minimum wages justified?

Background and context

A minimum wage, simply stated, is the minimum (or floor) price set by governments in the market for labour. To have an effect, it must exceed the ‘market clearing price’ at which the supply of labour (i.e. the number of those willing to offer their labour at the clearing price) matches the demand for it (i.e. by employers willing to pay that amount). Theoretically a minimum wage above the market clearing price will mean that supply exceeds demand and thus unemployment will result. However, given that labour is a resource which is rarely cut back without serious thought, demand for it may be ‘inelastic’ i.e. will not change much, limiting unemployment. How big an impact the minimum wage has depends upon how easy it is to substitute capital for labour, how much greater it is than the market clearing price, and whether the economy is booming or in recession. Whilst most minimum wages are national, there is also an international dimension to consider with regard to accusations of exploitation of cheap Third World labour.

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Argument #1

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Yes

Low wages are inadequate compensation for potential workers who are discouraged from entering the labour market. By making labour more attractive, more human resources will be used, thus raising national productivity. Even where capital is substituted (e.g. through use of machinery instead of people), a rise in efficiency will occur. Some studies suggest minimum wages raise productivity as they encourage workers to stay with a company, which benefits as they gain experience, and because they also encourage companies to invest in worker training.

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No

Artificially high wage rates lead to a misallocation of resources and market failure. More people will be encouraged to work, but fewer will be demanded by companies seeking to minimise costs. Such distortions lead to an uncompetitive inflexible market that does nothing to solve problems of skills mismatches.

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Argument #2

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Yes

Low wages are inadequate compensation for potential workers who are discouraged from entering the labour market. By making labour more attractive, more human resources will be used, thus raising national productivity. Even where capital is substituted (e.g. through use of machinery instead of people), a rise in efficiency will occur. Some studies suggest minimum wages raise productivity as they encourage workers to stay with a company, which benefits as they gain experience, and because they also encourage companies to invest in worker training.

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No

Artificially high wage rates lead to a misallocation of resources and market failure. More people will be encouraged to work, but fewer will be demanded by companies seeking to minimise costs. Such distortions lead to an uncompetitive inflexible market that does nothing to solve problems of skills mismatches.

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Argument #3

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Yes

Governments have a duty to reduce poverty and so to raise the standard of living of all households. There is an absolute minimum quality of life, below which families should not fall. A minimum wage that had no effect on employment would be unnecessary, especially as the wage rate is not necessarily the main consideration of employers when hiring workers. In fact, minimum wage laws can actually increase employment because minimum wage workers will have more money to spend, thereby stimulating the economy and helping everybody from the wealthy to the minimum wage workers themselves.

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No

The failure of the market to clear (‘classical unemployment’) will actually disadvantage the poor, as capital is substituted for labour. The lowest paid are often second earners in higher income households; whereas the poorest are unemployed, not low paid. Companies will either sack workers or suspend recruitment - worsening the chances of getting a job.

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Argument #4

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Yes

Low pay is a relative measure, thus increasing basic salaries would reduce occupational, sexual, geographical and age inequalities. Freedom from dependence is a vital part of self-respect; modern liberal democracies must encourage greater equality of consumption opportunities via higher pay rates.

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No

Redistribution is unlikely to take place in effect, as all that will happen is inflation of pay up the salary ladder in order to retain previous differentials. It is economically as well as morally defensible that lower skilled workers should receive lesser pay rates - a minimum wage merely fosters dependence on the equivalent of a government handout.

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Argument #5

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Yes

Poverty and inequality must be reduced not only in Western countries, but also in less economically developed states, where a minimum wage would prevent exploitation of the workforce, including child labourers. Whilst national minima will naturally vary across borders, forcing firms to pay higher salaries around the globe will improve the quality of life of the poor. If it is a moral imperative to relieve the relatively poor, then it is much more pressing to help the absolutely impoverished.

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No

Once salaries are increased, companies will withdraw production from such markets and there will be no income at all. The case of Asia over the past fifty years shows that initially poorly paid jobs tend to increase in skills and wages over time without intervention. Imposing a minimum wage will make a country’s products internationally uncompetitive and reduce inward investment. Imposing such standards upon the developing world would essentially be protectionism by the rich world.

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Argument #6

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Yes

Higher wages throughout the economy are not necessarily negative, as an increase in purchasing power leads to a higher quality of life. As the marginal propensity to save increases at higher levels of income, higher earnings should in theory increase the amount of savings available for reinvestment. Conversely, decreased marginal propensity to consume will limit any inflationary potential.

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No

As well as being internationally damaging, the macro-economic impact is also negative. As all pay levels are likely to rise, the minimum wage will be disadvantaged by inflation - increased costs are passed on to the consumer, stoking ‘cost-push’ inflation. For the NAIRU (non accelerating inflation rate of unemployment) to remain static, a rise in wages in one part of the economy would have to be balanced by a fall in another wage sector.

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Argument #7

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Yes

Tax credits are notoriously bureaucratic, as their administration via pay packets by firms is resented as costly and time consuming. Viewed as a political tool to artificially decrease the proportion of national income spent by the state, they also confuse workers. A minimum wage is a clear and simple promise of adequate compensation for labour. In any case, the two policies are not mutually exclusive.

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No

Minimum wages are blunt instruments that damage the most vulnerable. Small businesses cannot afford to pay such rates, whilst lower levels of pay for younger workers does not prevent discrimination against employing such individuals as the minimum is proportionately greater than the norm for older workers. A better alternative is a targeted system of tax credits which reduce the ‘poverty trap’ by making work more lucrative than benefits, and which end the ‘unemployment trap’ by topping up low pay with assistance to low income households yet still encourage a work ethic.

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Argument #8

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Yes

This is an argument for better enforcement of the system, rather than against it in principle - the majority of workers will choose to act legally and accept higher pay if possible.

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No

Avoidance and evasion will be encouraged by businesses who seek to minimise costs in the informal sector of the economy. Those desperate for work will connive and accept lower wages - only fair, as it is their fundamental right to exercise the free choice by opting for lesser pay rather than unemployment.

See also

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