The Impact of Minimum Wage Changes: Raising or Abolishing Minimum Wage

The ongoing debate over the minimum wage is a matter of significant interest in economic policy. Governments worldwide regularly adjust the minimum wage to align with inflation, but the implications of such changes can be far-reaching. This article explores what might happen if the minimum wage was raised or abolished, focusing on the economic, social, and motivational impacts.

Current Context: The Minimum Wage in the UK

In the United Kingdom, the government raises the minimum wage annually, typically in April. This annual adjustment aims to maintain wages in line with inflation, ensuring that the purchasing power of these wages is not eroded. However, the situation can be different in a deflationary economic cycle, where minimum wage decreases may occur. Even in scenarios where inflation is mild, low-wage workers may struggle to keep up.

For instance, the national minimum wage in 2024 was set at ￡11.44, and the national living wage was set at ￡12.10 for workers over 21 years of age. These figures are critical, as they ensure that workers can meet their basic needs and maintain a reasonable standard of living. However, the taxability and practical implementation of these wages are also crucial to consider, with the personal allowance threshold for 2024 set at ￡12,570.

Theoretical and Practical Implications of Minimum Wage Adjustments

In theory, during deflationary economic cycles, minimum wages could decrease. However, in practice, if minimum wages failed to keep up with inflation, low-paid workers would face financial hardships. This scenario would have far-reaching social consequences, including increased reliance on food banks, higher rates of homelessness, and greater instances of undernourishment among children. Additionally, social issues such as shoplifting and other forms of crime could rise as a direct result of economic stress.

Before the introduction of the Minimum Wage Act, employers paid extremely low wages to low-paid workers, treating them unfairly. The current minimum wage policies are designed to ensure that workers are paid what they are worth, but in practice, the market forces and employers' perceptions of worker value become critical. For example, the capabilities of workers like broom pushers, machine operators, dishwashers, and even management-level positions often exceed their current wages. The question becomes whether these workers are being compensated fairly.

Consequences of Increasing the Minimum Wage

Increasing the minimum wage could lead to several negative outcomes. Raising the minimum wage may result in increased living costs, particularly rent, which could outpace wage growth. Additionally, businesses, especially small and medium-sized enterprises, may face increased labor costs, potentially leading to higher prices for consumers or reduced profitability. Moreover, the global competitiveness of manufacturing could decrease due to the higher costs associated with labor.

Consequences of Abolishing the Minimum Wage

On the other hand, abolishing the minimum wage could have different outcomes. In the short term, employers might be more inclined to hire more trainees and pay them a nominal wage, thereby saving money. Over time, as these trainees gain skills and experience, they could be paid more appropriately based on their value to the company. This approach could potentially reduce the wage gap between skilled and unskilled workers.

Comparing Wages and Living Standards Globally

It is important to note that the minimum wage in Western countries is significantly higher compared to those in developing nations. For example, in Sri Lanka, the national minimum wage is as low as 3 dollars per day, and even these workers can subsist on such wages. The problem is not necessarily the level of wages but the rising living costs, especially rents, which are unmanageable in many developed countries.

The root of the issue lies in land zonation policies, which often exclude low-income housing. Governments often have policies that restrict land use for housing purposes, leading to a limited supply of affordable housing. This scarcity of affordable housing contributes to the issue of high rents and the inability of many people to find suitable accommodation, even in relatively expensive areas.

Historically, during the 1970s, a single wage was often sufficient to pay a mortgage and support a family. However, as these policies have evolved, the cost of living has increased, diluting the purchasing power of a single wage. This shift has significant implications for family planning and social stability.

In conclusion, the debate over the minimum wage is complex and multifaceted. While raising or abolishing the minimum wage has potential benefits and drawbacks, it is essential to consider the broader economic, social, and motivational impacts. The ultimate goal should be to create a fair and sustainable wage system that supports workers and promotes economic growth.