Minimum Wage in the United Kingdom

Minimum Wage in the United Kingdom

Introduction

The short history of minimum wage (National Minimum Wage) in the United Kingdom has been marked from birth by the ongoing controversy between unions, employers and management on their need, amount, economic benefits and contraindications. Its introduction in 1999 due to the commitment of the Labour Party with trade unions during the 1997 season, after which those came to power, considered in part as compensation for the loss of power experienced by the unions during the long years of Conservative administration.

Discussion

Most industrialised economies have a statutory minimum wage, below which employers are not legally allowed to pay. This fact is in itself significant. Economic theory would suggest that wage levels should be left to market forces to determine, though some action might be taken through the tax and benefits system should market forces result in an unreasonably low wage. This simplistic interpretation of economic processes still underlies continued attempts either to do away with minimum wage legislation, or at least to reduce the level of such wages so as to make little impact on market outcomes. However, such thinking has — to some degree at least — been overridden by policy makers.

Before the election of the Labour Government in 1997, the UK was one of the few economies without a legal minimum wage. Kitson, Michie & Sutherland models the effect of introducing such a minimum wage on the public finances. The cost of such a measure is found to be far less than is sometimes envisaged, due to the various costs to the Treasury of having low pay in the economy. The most direct cost of low pay is the income support and other benefit payments which the Treasury provides to low-paid workers. In addition, some of the increased wages which go to workers who for the first time start to receive a minimum wage will find its way back to the Treasury via income tax, VAT, and so on. The article reports calculations that find that a national minimum wage set at £4.15 per hour for employees aged 18-64 would have the immediate effect of raising tax revenue and reducing benefit payments to the tune of £3.7 billion per year. The net effect on public finances might well be less than this, not least because of the higher wage costs of low-paid public sector employees. But it is also clear that the above calculations reveal substantial resources with which to offset the adverse effects (which are the ones that normally receive attention). In addition, the authors demonstrate that the distributional effects of the introduction of such a minimum wage are indeed positive — a finding which may appear intuitively obvious but which is nevertheless sometimes denied in policy discussion.

Sutherland gives more detail to the above sort of calculations, focusing explicitly on the minimum wage (whereas Kitson, Michie & Sutherland is primarily concerned with the costs of a public job-creation programme). Sutherland discusses the distributional effects of a range of different ...