The following procedure was followed in the process of developing this position paper:
· Going through course materials (lecture notes, textbooks) to understand more about the topic of minimum wage.
· Researching on the country whose minimum wage would be compatible with UK’s laws.
· Understanding similarities and differences in both countries
· Researching on the theoretical background of minimum wage law in economics literature.
· Making notes that would be included in the paper.
· Writing the paper by building on the notes taken. This was subsequently followed by editing and subsequent preparation of this final draft.
The use of minimum wage laws as mechanisms of ensuring better remuneration and livelihoods for lowly paid labour force has been spreading in recent decades. Countries that have practiced these laws for many years have been adjusting their minimum wages upwards in belief that existing levels have been washed-ff by inflation. Despite the popularity, it is still not clear whether the laws really help members of the labour force in need of better increased living wages. Some have argued that the policies are helpful while others, like this essay, argue that minimum wage laws have more negatives than positives. This report is a major contribution on the continuing debate regarding minimum wage laws in the UK as well as in the United States. In addition, many other countries in the world are in the process of adopting laws that would guarantee respective labour force better lives and job satisfaction.
I. Historical Perspective: UK and US
Minimum wage refers to the regulated amount of remuneration received by national labour force. Policies effecting this arrangement are either developed at the national level and also in regional legislative houses. As a result, countries could a national minimum wage and several others from regions, whose policies depend on local average incomes. However, local minimum wages are usually higher than nationally legislated laws. Many countries in the world, including the developing ones are increasingly making use of minimum wage laws (OECD, 2003, p. 334). As a contribution to the minimum wage debate, this paper shall investigate on the effectiveness of the laws in United Kingdom and the United States. It shall be argued that the use minimum wage to guarantee better remuneration and livelihoods in the labour force has historically failed to meet expectations; instead, the policy has been confining the intended members of the labour force into poverty.
The choice to compare the two countries is occasioned by the similarities in effects of their respective minimum wage laws. In both countries, it is easy to see that most of the people at the bottom of respective ladder are minorities, most of which happen to be recent immigrants, or even descendants of immigrants who have been in the countries for shorter periods of time (Sowell 2004). This state of affairs means that both countries’ minimum wage is directed at helping these minorities, among other citizens from poverty. The durations that both countries have been practicing the laws is also a factor, given that United States’ minimum wages laws were established in late 1930s, immediately after the country’s economic depression. UK minimum wage laws were on the other hand developed in 1999 (Macdonald, 1999, p. 279). This means that both countries have been practicing the laws for longer periods of time. The countries have also been instrumental in influencing other nations into adopting minimum wage laws. Though United Kingdom started using the law in later days of 20th century, it had previously legislated on laws directed at enabling workers to estimate the amount of remunerations equating to their labour. It was common to have employers being dragged courts for the failure of adapting to these laws.
II. Theoretical Perspective
Labour is part and parcel of factors of production which also includes capital and land. However, many policymakers as well as majority of individuals do not take it as such. Indeed, labour is seen as a special in the production process, reason being that human beings are the ones who provide it (Smith, 2002, p. 195). As a result, many individuals, including policymakers, tend to be sympathetic to this factor of production, and thus retort to controlling of labour prices. Buts this should not be the case. The price of labour should be left to the market just like other factors of productions are left to participants in the market to control. Indeed, it should be considered that labour is a product like any other good or service that is dealt with in the market (Perlman, 1975, p. 75). Just like there exists a market for other goods, so is there a market for labour. This market has labour force as suppliers of labour and employers as demanders. Since such an arrangement already exists, it is important that participants in the market to be left alone. This is the only way that efficiency mutually beneficial to all parties can be achieved. Interference such as the one cause by the one caused by minimum wage laws destroys efficiency in the labour market. When market players (demanders and suppliers) are left alone to run affairs, they tend to gravitate towards equilibrium, that is, they are able to meet the need of either of them. This is achieved through bargaining and sometimes haggling and could take sometime before agreements are reached. In this regard, all players happen to be price takers in their respective industries. However, the introduction of minimum wage, which happens to be above the prevailing market rates, leads to a situation where supply for labour in the short run. At the same time, demanders in the market for labour (employers) feel the increased cost of more employees and thus choose to rely on the current ones. Fact that regulators cannot allow them to pay lesser than the set minimum wage could make some employers do away with labour and start relying on machinery or close their establishments all together. In this case, the entire economy tends to suffer because goods that could have been produced by the cheap labour do not get in the market place, which leads to shortage and increase in prices. Consumers (the masses) have to therefore bear with increased cost of living—this illustrates fact that minimum wage ends up hurting the very people it was supposed to help.
III. Effects of Minimum Wage
There are several negative effects of minimum wage policies, some of which will be detailed in this section. First, the use of minimum wages tends to have negative effects on the section of the labour force it is supposed to help. This is because policymakers tend to set the minimum wage at higher rate than what the market should pay (Worthington & Briton, 2006, p. 151). Indeed, pegging the minimum wager at higher rates than the prevailing market value is believed to help that shield the labour force from inflation before the next hiking is done (Waltman, 2004, p 120). It can be argued that policymakers succeed at helping the labour force to escape inflation in the short run, but this does not last in the long run, because authorities cannot predict on the future inflation rates. As a result, the poor people that the policy was intended to help end up suffering before policymakers enact new minimum wage policies. Unfortunately, authorities in such situations fail to understand that roots to current problems are deeply buried in minimum wage policies previously developed. The most logical solutions in such a case is a case is complete eradication of the policies and return the power of determining price for labour to stakeholders in the industry. But this rarely happens. Policymakers are generally quick to solve the crisis through coercing employers into paying labour in accordance to ineffective policies. Such decisions could only lead to exacerbating the situation instead of solving it. It is not unique to see some politicians running claiming that the minimum wage was way below what employees would need to live, an thus demand that new laws with higher minimum wage to be enacted. This is most likely to happen at the local level. In the United States for instance, states with higher incomes tend to have minimum wage policies way above the nationally regulated level. These local wages get regulated upwards every time that the national wage gets increased.
Secondly, minimum wage creates a false impression about the value of labour in a country’s labour force. For instance, setting the current minimum wage at £5.52 (BBC 2007) tends to mean that the cheapest labour in the country should be valued at this price. This is hardly the true picture because there are people in the country willing to work at pay rates lower that the one set by authorities. At the same time, the current minimum wage assumes that paying labour at that amount would be appropriate for all employers in the country. However, there are employers who cannot afford to pay this highly set labour price, which means they have to decrease the number of employee or close down all together.
Thirdly, as listed in point number one on this section, minimum wage laws tend to hurt the people it intends to help. For instance, it is hoped that minimum wage would help the youth, especially those coming from poor families to earn better wages in their holiday or after school jobs. This very intention of the policy is not easy to achieve because of the increased competition in the guaranteed-pay-labour-market. Reason: increase in minimum wage result to making part time jobs more attractive to kids from well-to-do families. Having kids from poor families who attend public schools compete for part tome jobs with rich kids who attend prosperous private academies would result from the latter being selected for the said job position. This should not have happened were both groups of potential employers allowed to express their desired pay. It is most likely that poor kids would be willing to work for less pay, meaning that rich kids would be edged from this market. However, having set the minimum wage way above what employees would be willing to achieve distorts the market. Unfortunately, children of minority groups are the ones that end up being taken off the labour market, meaning that they would continue to suffer as their rich counterparts continue to bask in the job market. This factor has led to lack of enough job experience that would be demanded by employers when kids from poor families enter the job market (Seymour, 2000, op. 154). Lack of experience and attending lowly achieving schools would mean continued life under poverty for the generation, just like it happened to their parents and generations before them.
Fourthly, minimum wage over the prevailing market value, which often happens to be the case, increases the cost of doing business. Small businesses that would be willing to higher cheaper labourers are not able to do so because of the increased cost of doing business (UK Parliament, 2007, p. 257). This means potential employers of the poor and youth fail to establish their businesses. In the end, the same poor youth that the policy was directed at helping end up not getting employ, and thus have to continue with their destitute livelihoods. This low investment level means that masses would have fewer goods and services in the market, which is characterised by higher prices. Again, poor neighbourhoods stand to feel most of the effects; lack of investment in their localities adds up to higher security costs that entrepreneurs will have to face.
For all the above reasons, it is evident that use of minimum wages has caused more harm than good. Experiences in both United States and United Kingdom illustrate that it is the poor people and their descendants who pay the greatest price of minimum wage policies. On the other hand, the middle class in both countries benefit from the laws, because increased wages make jobs lowly paying jobs more attractive, and thus out compete needy youths from the job market.
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