UBI or the minimum wage?
2.1
The minimum wage’s impact on growth
The first consequence of a minimum wage is its impact on the economy’s growth, and conventional theory suggests reasons for a minimum wage to both boost and hinder it. Firstly, a minimum wage is likely to increase the propensity to consume within an economy (the proportion of income that consumers spend on goods or services rather than save), stimulating growth by increasing the amount of money immediately invested back into the economy once it has been paid as wages. When firms are forced to pay lower-income workers more, they usually respond by paying less to higher earners in order to maintain profit levels. This causes a higher proportion of total income to be paid to lower earners, who typically spend more and save less than higher earners (Fillion, 2010). A minimum wage could also increase the productivity of firms. By charging firms higher costs for labour, they are more likely to invest into training employees to make them more productive, hence increasing the productivity and real national output (growth is measured in terms of real national output: national output is the amount of goods and services produced in the economy and real means adjusted for inflation) of the economy (Pettinger, 2019). Higher paid workers are also more productive owing to reduced stress and better health, so this will likely raise the productivity of the economy further.
Finally, minimum wages also cause a ‘ departure from efficiency ’ in the labour market, leading to a reduction in real national output in the economy. Graph (a) from figure 1 shows a typical supply and demand diagram for an unrestricted labour market, showing the overall benefit to the buyers and sellers in the market as the buyer and seller surplus. In this graph, the market is at equilibrium with the going price of labour set at P1 and the quantity of labour sold at Q1. However, graph (b) shows the supply and demand in the labour market after the minimum wage has been introduced. The seller’s surplus increases in size overall, and the buyers’ surplus shrinks, but a deadweight loss (essentially a waste of potential benefit from the market) is created in the process. The introduction of the minimum Note. Figure 1, a theoretical labour market before and after a minimum wage is introduced. From Microeconomics: Theory Through Applications.(https://saylordotorg.github.io/text_microeconomics-theory-through-applications/). Copyright 2011 by Saylor Foundation.
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