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
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