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Whether a National Minimum Wage Reduces Relative Poverty

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Relative poverty reflects the fact that some sections of society have an income far lower (e.g. 50% less) than the average salary. In the UK the National Minimum wage is a legal requirement. Firms must pay workers an hourly wage of at least 5.05 for those over 21. The development rate for those 18-21 is 4.35

Since the introduction of the NMW many low paid workers have seen an increase in the hourly wage as firms are obliged to pay workers the statutory minimum wage. To some extent this has helped reduce relative poverty as the lowest paid workers have seen a significant increase in their weekly income. This is more prevalent in the North where wages tended to be lower, fewer jobs in the south have been affected by the NMW.

However it is worth noting that the poorest sections of society tend to be those on benefits such as JSA (60% of the poorest tend to be unemployed) and incapacity benefits, therefore these groups will not benefit from a NMW. Also many on the NMW may be second income earners e.g. the wife of a main breadwinner. Therefore these households may be quite well off and would not classify as being relatively poor anyway. Therefore this is a limitation of the NMW in reducing poverty.

Another concern about the NMW is that if it was increase it may cause unemployment. According to classical theory an increase in the NMW will lead to real wage unemployment.

The extent of unemployment would depend upon the elasticity of demand for labour, if it was inelastic unemployment would only increase a little. However If there was an increase in unemployment this would have the effect of increasing relative poverty rather than reducing it.. This problem may be most likely to occur in industries with low profit margins and regions where equilibrium wages tend to be low.

However evidence suggests that UK labour markets are not perfectly competitive but employers may have significant Monopsony power. This is especially true part time temporary service sector jobs where workers have little union representation and few rights. If workers face Monopsonist a higher Minimum wage may not cause unemployment, in some circumstances it may decrease

Empirical evidence suggest that increasing the NMW does not cause unemployment to increase suggesting this model is more accurate than the classical view. However it will clearly depend upon how much the NMW is increased. It is also likely that some labour markets will be more competitive than others therefore the effect may differ for different industries.

Other positive benefits of the NMW include the fact it may increase the incentive for the unemployed to get a job rather than stay on benefits, however the JSA is quite low and the gap between benefits and work is quite high already.

In conclusion an increase in the NMW can help the low paid increase their income, thereby reducing relative poverty to some extent. A serious concern about an increase is that in some labour markets it may cause real wage unemployment therefore increasing poverty. However evidence suggests that the increase would have to be very significant for this to occur because many labour markets tend to be uncompetitive. There could also be a case for increasing the NMW more in the south where wages tend to be higher, thereby reducing relative poverty in the south.

In conclusion raising the minimum wage can cause a decrease in relative poverty for those in work but its extent is limited as much poverty stems from those living on welfare benefits. In the US the benefits of raising the minimum wage are likely to be higher because of the large numbers of workers working close to the statutory minimum wage.


About the Author

Richard Pettinger studied Politics and Economics at Lady Margaret Hall, Oxford University. He now works as an economics teacher in Oxford. He enjoys writing essays on Economic and he edits an Economics Blog focused on UK and US economies: http://www.economicshelp.org/econ.html.


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Article Published/Sorted/Amended on Scopulus 2007-04-01 23:49:27 in Economic Articles

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