One of the UK’s Government policies that help to reduce economic inequalities and poverty is National Minimum wage. By assessing this policy, we can discover how it helps to reduce economic inequality and poverty, the effects it has on macroeconomics and the benefits and implications that may arise. The National Minimum Wage Act in the United Kingdom was established in 1998, the purpose of the act was for employers to pay workers a minimum wage. This means that employees will have increased income and this in turn will help to reduce relative poverty. The benefits that could occur from national minimum wage include; reduced inequality and narrows the income difference between high and low income households.
It lowers poverty as low income households gain more income, this may also lead to other workers entering the labour market as the higher minimum wage pay is more of an incentive. Finally, it leads to less exploitation as workers have to be paid the minimum rate at the current period. However, minimum wage has some drawbacks. When minimum wage is increased this can lead to inflation because the increased wages leads to increased costs which then leads to higher prices. It can also result in loss of jobs because business can reduce the number of employees in order to compensate for the increase in labour costs.
In 1909 the Trade Boards Act (TBA) was developed to enable the government minister to set up a representative board to negotiate wages in any industry, where wages were significantly low compared to other industries. In 1945 the TBA developed into the Wage Council. This allowed wage councils to be established if collective bargaining was weak. Using a representative council, an agreement or a vote would decide the conclusion of the wage. During the 1960’s and 1970’s views about wage councils began to change and people were more favourable of Trade Unions and collective bargaining, causing unions to separate from the government (Finn D. 2005).
This led to major strike action to appeal pay restrictions and during the 1970’s and resulted in ‘21.9 million working days each year lost to strike action’ (Anitha, S. and Pearson, R. 2013). Following this in 1979 Thatcher become Prime Minister during this time “British labour unions were quite powerful but labour markets were rigid, inflexible and in many ways uncompetitive”. (Bronars S. 2013) Thatcher’s aim was to reduce union power and the number of working days lost to striking to prevent costing British industry and to reduce inflation using income policies. As a result of this “According to the BBC, Union membership fell from a peak of 12 million in the late ’70s to almost half that by the late ’80s. They’ve never recovered.”
This led a free market economy and wages were determined by ‘supply and demand’, meaning that the supply is the workers available and their skills and demand is the number of workers needed. In 1997 the Labour government set up a Low Pay Commission which then led to the National Minimum Wage Act. The main benefits of introducing a national minimum wage include; reducing poverty, increasing productivity and using labour more effectively and making jobs look more attractive and reducing labour turnover. Resulting from this act one of the main aims was to push out poverty by increasing wage to ensure that people are paid enough to cover the cost to live.
“When it was first introduced in April 1999, the rate of the NMW was £3.60 per hour. At that time, 1.9 million people were believed to be paid less than that”. (Dunt I. 2018) Therefore, by introducing this policy it meant that workers where been paid fairly, and this also made jobs appear more attractive as workers would be less likely to be exploited for their labour and due to increased income for workers, this could lead to more income and therefore a better standard of living. Introducing the national minimum wage benefited economic growth because if people are earning a higher income, they can be pushed out of poverty. People may also have more disposable income, so there is more demand and therefore more spending in the economy and in turn, this could lead to economic growth.
However, some argued that NMW could increase unemployment, this is because business may not be able to afford the rising cost of labour in a competitive market. Also, because labour would cost businesses more, this means that redundancies could be made in order to help lower labour costs. Therefore, NMW could have a negative impact of poverty because if unemployment rises, then demand will be lowered and therefore there will be less supply needed and therefore this could have a negative impact on economic growth.
The government estimated that the likely impacts of the NMW would include a “total around 2 million people should receive higher earnings” (Bain G. 1999), the majority of businesses, even in low paying sectors should be able to successfully pay workers the minimum wage and will likely move to competing on productivity rather than low wages. The government also predicted this act would particularly see a rise in wages for women, non-white workers, lone parents and young people, who were likely on a lower wage before this act was implemented. Since the introduction of NMW, over the past 21 years, workers have seen an increase in wages (due to the increase in the cost of living), which in turn, has helped many out of relative poverty due to the increase in income for many workers.
The UK’s pay growth has increased in recent years due to the strengthen of employment rates and more bargaining power to demand higher wages. “The unemployment rate in the UK edged down to 3.9 percent in the three months to January 2019, its lowest level since the November 1974 January” (Ferreira J. 2019) As a result of this, there are currently “1.36 million unemployed people in the UK”. For the UK the low unemployment rate means that more people have jobs and therefore this increases income. As a result of this it increases demand and spending in the UK economy, which should likely lead to an increase in aggregate supply and business investment on new technologies to keep expanding.
However, today market growth for the UK has been slow due to the economic and political uncertainty of Brexit affecting business investments. “Business investment was estimated to have fallen by 1.1% to £46.9 billion between Quarter 2 2018 and Quarter 3 2018”. (McCrae A. 2018). Business investment is the expenditure on capital spending, therefore if there is a reduction in investment it means that aggregate demand will decrease due to a reduction in aggregate supply because of a decrease in the productivity capacity of the economy. The likely impact would mean that there is less capacity in the economy so could cause output to decrease and so people gain less income and therefore less is spent causing a further reduction in aggerate demand. Therefore, this could impact UK poverty because the less income people have, the more likely they are to be pushed into poverty as they have less real income. However, recently the UK’s economy has been driven by increased consumer spending, this is due to an increase in real income.
The increase in income due to higher employment rates has also helped the bargaining power of worker for their wages. Because there is lots of employment opportunities in the UK economy, it means that workers are paid based on productivity, therefore if a firm is paying minimum wage, rivals could attract these workers by offering a higher pay and workers can bid up their wages in line with productivity. Therefore, due to this increase in pay growth it has meant that income has increased and as a result generated more consumer spending in the UK economy. This will also have a positive impact on pushing people out of poverty because higher employment coupled with higher wages means that more people are earning a higher relative income. Higher rates of employment put pressure on wages to increases, however this costs business, especially in an economy where businesses are not investing. Therefore, businesses have two choices, to absorb the increased costs or to pass the costs onto consumers and causes inflation of the price of goods.
Today, in the UK “around 14.2 million people live in poverty” and “60% of people in poverty in Britain live in a household where someone is in work”. (Evan L. 2018). Over recent years, while there has been a slight decrease in the level of poverty due an increase in income in poorer households, it has remained relatively flat and unchanged. Appendix 1 (Cribb J., Keiller A. and Waters T. 2018) shows that absolute poverty fell by ‘20% to 19% between 2015 and 2017, the lowest rate seen over the past 15 years’. (Cribb J., Keiller A. and Waters T. 2018) It also illustrates that poverty in different demographics, showing that 2016-2017 child poverty was 26%, which double the rate of pensioner poverty which was at 13%.
Appendix 2 (Cribb J., Keiller A. and Waters T. 2018) expresses the rate of relative poverty of different demographics since 1961. The data shows that while relative poverty has remained relatively stable over the past 15 years, there has been an increase since 2011-12, particularly in the demographics of pensioner and children. Although income has risen in lower income households and this has seen a reduction in absolute poverty, this reduction has grown slower than average and this therefore has resulted in an increase in relative poverty. ‘Since 2011 to 2017 absolute poverty fell by 2.5%’. (Cribb J., Keiller A. and Waters T. 2018)
The different groups of demographics pensioners are the smallest demographic facing poverty and during this period employment grew and resulted in a reduction in child poverty. Although income of poorer households has been rising, the reduction in benefit cuts are a key factor than has reduced income growth and thus resulted in increased relative poverty, coupled by the increase in absolute poverty been very slow growth. Relative poverty has increased from “21% in 2011‒12 to 22% in 2016‒17”. (Cribb J., Keiller A. and Waters T. 2018) Although there has been a slight increase in relative poverty, over the past 15% years it has remained relative constant.
‘The Office for Budget Responsibility (OBR) predicts that earnings will grow which in turn will boost incomes of working households also this will be helped by the increase National Living Wage and in turn this will lead to a reduction in absolute poverty. However, in coming year OBR expect little growth in employment and benefit reforms will reduce the incomes of low income households. Also the ‘two-child limit’ limits child element tax credit and universal credit to the two children and this will start to affect many families with children born after 2017, when the policy was introduced. Using this, Hood and Waters expect that overall absolute poverty will stay relatively unchanged between 2016 and 2022. If, likely predicted, absolute poverty stayed flat and rise for children, low income houses will likely fall behind middle income households and therefore this will lead to increased relative poverty’. (Cribb J., Keiller A. and Waters T. 2018)
‘Between 2011–12 and 2016–17 real incomes at the median increased by 8%. The recovery saw that employment rates and the highest growth in earning were among low income employees. However, this could be partly due to benefit cuts and if the planned cuts for benefits takes place, then this will impact lower income households and therefore increase inequality. The Office for Budget Responsibility expects that although slow, real earnings will increase between now and 2022. While income has increased by in the middle income by 8%, in the 10th and 90th percentile it rose by 4.3%. As a result of this, inequality has halved in the top half of the income distribution, but this has also mean that inequality has risen in the bottom half’. (Cribb J., Keiller A. and Waters T. 2018) Appendix 3 (Cribb J., Keiller A. and Waters T. 2018)show that employment for low and middle income earners has increased by “5 and 2 percent points” and slightly fell for higher income earners. The growth in low income employment has seen a significant increase in because the employment rate for low earners is low to begin with, so the proportion increase is bigger.
Between 2011 and 2016, employee earning has grown particularly for the low income earners by 10% for the bottom 15% of the distribution, whereas medium income earners rose by 5% and higher income rose by less than 2%. This rise in low income earners has been due to the introduction of the National Minimum wage in 2016 and because of the increase in national minimum wage rising by “3.5% between 2011 and 2016”. As a result of the increased earning of low income earners, it has helped to reduce inequality for the lower percentile and thus helps to push people out of poverty. ‘Over recent years, income has been faster growing for the middle of the distribution compare to the top and bottom. At the bottom this is likely due to the cut in benefits however, because of this, it has seen an increase in employment for lower income households. At the top, growth has been slow due to falling employment and slow earnings’. (Cribb J., Keiller A. and Waters T. 2018)
Using Gini coefficient, it can measure inequality in a distribution into a statistic between 0 and 1 (it would be zero if everyone in the UK received the same income). Appendix 4 (Cribb J., Keiller A. and Waters T. 2018) shows that between 1961 and 1982 while there are small differences, the inequality measure roughly stays the same at around 0.26. However, in the 1908’s to the 1990’s there is a sharp increase in inequality and the coefficient rose to 0.34. Since the Great Recession it has even off and remains a similar level to the 1990’s. However, the data shows that while inequality remain relatively the same, it has increase since 1970’s and 1980’s and therefore the gap between higher income earners and low income earners has increased.
Based on the recent figure of inequality, for the future it suggests that; Higher earning growth increases inequality because higher earners make up a bigger share of income for middle and higher income households. Since the recovery, earning growth and employment has been larger for lower earners and as a result of this, it will likely reduce inequality. However, benefits and tax credit cuts typically increase inequality as theses make up a larger of income for the households at the bottom of the distribution. ‘Over the coming years, the Office for Budget Responsibility predict that there will be a positive growth in real earnings (although slow) and that there will be little change in employment. Both would act to slow down rises in inequality. However, the benefit cuts by the government will likely lead to increased inequality. Hood and Waters using this forecast predict that between 2015 to 2022, the ratios between the 90th and 10th percentile of the distribution will increase from 3.9 to 4.4’.
National minimum wage affects households differently. The benefits are seen particularly for middle income households, whereas households at the bottom only benefit by “45% once tax and benefits are taken into account” (however they will see at bigger proportional increase in income) and the top households see very little or no impact of minimum wage. Businesses can have an impact on inequality. When minimum wage increase, to reduce inequality businesses could respond by reducing the pay to managers and other people better paid in the company. This would mean that the company could pay the minimum wage workers the increased rate of pay without increasing their businesses costs and therefore this increases the income of the lower earners and the company doesn’t need to increase the cost of their prices which would be passed onto consumers. However, if they raise their prices, it means that they can account for the extra labour costs, but without costing the businesses more and this benefits the workers because it means less jobs are lots because businesses don’t need to reduce costs as they are accounted to in the higher prices.
Although this would help to reduce inequality, this is not how many businesses respond to increases in minimum wage. Many businesses often respond by reducing the number of jobs and therefore it doesn’t increase their labour costs, but this contribute to increases in inequality. Therefore, if minimum wage continues to rise it could have adverse effect for inequality, this is because only some businesses can account for the increased labour costs by reducing the wages of the higher earners in the business, but there are limits to the amount this can be reduced. “If they already pay less than competitors who have fewer low paid staff, and don’t pay large dividends, then it seems overly optimistic to believe that they can identify increase productivity without decreasing unemployment”. (Stacey T. 2017) Therefore, this shows that if minimum wage continues to rise eventually it will lead to increases in inequality.
Today, the UK’s economic growth has expanded by 0.2% in the last three months and by 1.4% across 2018. The Bank of England suggest that the likely cause for this is because of the decrease in business investment due to the uncertainty of Brexit. Also the slow down of major trading partners including China and the EU. Many suggest that the economy is 2% post referendum than expected and The Bank of England predicts that this year will be the weakest growth in a decade’. (David D. 2019) “Private consumption and government consumption were the main driver of growth, while gross capital accumulation and net trade contributed negatively”. (Ferreira J. 2019).