The National Living Wage – Is it worth it?

29 Aug 2017

Labour leader Jeremy Corbyn has promised a rise in the Minimum Wage such that it is in line with the National Living Wage of £10 per hour by 2020. He has also promised to end the age brackets currently put in place, favouring instead a flat rate for all ages.

 

Many supporters of this would justify this action by saying it’s a requisite of inflation. At an average inflation rate of 3%, the current minimum wage for over 25s would only need to rise to around £8.20 per hour by 2020 to factor this in. If inflation were to rise to a 4% average over the next three years then it would still only need to rise to £8.44 per hour.

 

Straight away we can rule out inflation being the main motive of the Labour party in wishing to increase the minimum wage. This is especially clear when you consider that, for 16-18 year olds, the minimum wage would also be £10 per hour, which is an increase of over 100% from £4.05 per hour.  

 

One benefit of increasing the minimum wage is that it reduces the number of people claiming benefits because they have more of an incentive to work. Consumption would therefore rise, leading to increased growth. Productivity would also rise which would lead to an overall increase in the output of the economy.

 

However, there are some negatives, and they are quite damning against such a large sudden increase to the minimum wage. The biggest is unemployment.

 

By having a minimum wage at all it causes excess supply of labour and the higher wage causes firms to demand less labour. Therefore, firms hire less people, though most western states look past this because of the moral implications of not having a minimum wage at all.

 

What must be considered, however, is that whilst small increases in the minimum wage have been proven not to cause further unemployment, a large increase could potentially have this effect. Some people earning more, but even more people out of work, would not benefit the economy, especially if those newly unemployed started claiming benefits.

 

On the other hand, companies could accept the increase in wages they would have to pay, and keep on all their workers. However, it is unlikely that companies would want to give up profit, and it is therefore likely they would offset these costs to the consumer in the form of higher prices. Thus, inflation is actually caused by this process. It must also be mentioned that the companies we are talking about here are not multi-nationals. They are the small businesses that are already struggling to keep maybe two or three workers on their payrolls.

 

I would be in favour of increasing the minimum wage. This is especially applicable to the lower age ranges: people my age who are trying to start living by themselves, and providing for themselves. I cannot see a 16-18-year-old being able to survive without extra help if he or she came out of school early, and tried to provide for him or herself. As a member of this age group it feels as if those who choose not to move on to further education are bound for failure, or at least hard times, because of the wage they would possibly receive. This is something that I feel the government has overlooked.

 

There remains, however, no way of telling how big a wage increase needs to be to cause a change in the employment figures. Caution must be taken with such a decision and, by simply plucking a number like £10 out of the air, it appears the policy has not been fully worked out. This is especially because a fall in employment could have quite drastic consequences.

                                                         

Only time will tell though, at a time when Brexit negotiations dominate politics, this might be taking a back-seat for quite a while.

 

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