Increasing minimum wages: A blessing or a curse?

Debates regarding the minimum wages across nations are far from over. Ten years after the financial crisis of 2008-2009, the worldwide economy seems to be quite stable, with inflation, unemployment, and salaries rising, on average, at a constant rate. But the main question remains: How far can the minimum wages actually go?


I would like to focus my discussion mainly on the USA and UK, two countries with very powerful economies, but also with a level of uncertainty regarding the future.


Democrats in America started the initiative “fight for $15” in 2012, which aims to double the minimum wage from $7.25 per hour to $15 per hour. Most of the protesters are low-skilled employees working in the airports, gas stations, convenience stores and fast food chains, who claim that they are unable to cover the costs of living with such low salaries. Even though a national law has not been passed yet, the initiative has been successful on the state and local level. Big cities like New York, San Francisco, and Seattle, where the expenses are significantly higher than in the rest of the USA, have already attained the municipal minimum wage of $15/hour. Other states like California, Illinois, New Jersey, Maryland, and Massachusetts have started the process of gradually increasing the minimum wage over the next years.


Economists' opinions about this phenomenon tend to differ. Opponents think that this will result in higher unemployment rates and higher prices, while the optimists highlight the benefits of it and believe in the equitable distribution of wealth. However, over the past two years, the unemployment rate in the USA was really low, with no clear difference between high-wage vs low-wage states, which proves there is no direct link between high wages and the unemployment rate.



Moving on to the United Kingdom, on April 1st 2019, the minimum wage (now called the “National Living Wage”) has gone up from £7.83 to £8.21 (around $10.75), which represents an increase of 4.9%. Great Britain is among the countries with the highest minimum wage in the world, but the government is confident it will go even higher. The business minister Kelly Tolhurst claims that the ultimate goal is to offer a “fair day’s pay”, and to increase the utility and the wellbeing of the population. In addition, Bryan Sanderson, chairman of the Low Pay Commission, states that the pay-rise will be above inflation, thus the difference would definitely be noticed and have a positive impact.


Browsing through the modern history of Great Britain, we notice that, for a long time, the country didn’t have a national minimum wage at all. However, politicians started to worry about the workers’ exploitation, so they came to an agreement and officially introduced the minimum wage 20 years ago, on April 1st. After this move, many economists were skeptical and predicted chaos in the years to come. Professor Patrick Minford from Cardiff University foresaw a dramatic leap in unemployment, due to the fact that firms could no longer afford to employ as many workers as before, having a higher cost of labor. Even though people feared that the imposition of a wage would cause more harm than good, this didn’t happen. In contrast, unemployment is, nowadays, at its lowest level in the last 40 years (only 3.9%). Following the success of increasing the salaries, a £10/ hour minimum wage is predicted for the future, which will rank Britain even higher in the international league tables.



Despite all these facts, how high can it go before the assumptions of doom made in the 1990s come true? At some point, companies will reach their limit and will no longer afford to increase wages even more without some dramatic changes, with negative impact on the economy. The companies in labor-intensive industries have already responded by increasing prices. Data shows that further rises in the minimum wage could actually decrease employment (thus increasing unemployment) more quickly than in the past, even if only 7% of the workers are paid the minimum wage.


In conclusion, by analyzing the effects of increasing the minimum wages in the UK and the USA, we can observe the trend and make assumptions about the future, adapting to each nation’s economy. Up to this point, the steady increase in the minimum wages has had a positive impact, causing unemployment to go down and people’s life satisfaction to increase. However, this cannot last forever, taking into consideration the sustainability in the long run and the firms’ possibility to pay higher wages, thus having higher costs.

 

WRITTEN BY ANA LETITIA FOR BESA

PLEASE DIRECT ANY INQUIRY TO AS.BESA@UNIBOCCONI.IT

#wage #minimumwage #Economics

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