UBI or the minimum wage?
wage means that all transactions in the labour market must take place at or above the price P2. However, demand for labour at this price is only equal to Q2, meaning that all the transactions between Q2 and Q1 no longer take place. Previously, all these transactions were creating benefit for both parties, (otherwise they would not have been happening as both parties must consent to a transaction for it occur), meaning that all the benefit that would have been gained through these trades is lost. Since this is a labour market the benefit to firms would have been increased production, meaning this departure from efficiency has reduced the output from firms and therefore the economy, equating to reduced growth (Cooper and John, 2012). Once all these effects are accounted for, the actual impact of the minimum wage on growth varies from economy to economy. The effect of an increased propensity to consume can be very large; the Economic Policy Institute estimated that when the USA increased its national minimum wage by 70 cent in 2008, and again by the same amount in 2009, those two increases caused an extra $8.6 billion in consumer spending across the economy (Fillion, 2010). Furthermore, an analysis of data from over 360,000 firms before and after the introduction of the National Minimum Wage (NMW) in the UK found the elasticity of aggregate productivity with respect to the minimum wage (the amount that overall productivity increases relative to a rise in the minimum wage) was around 1 (Rizov, Croucher, and Lange, 2016). This is exceptionally high; a 20% increase in minimum wage would increase productivity in the economy by the same amount. Everything considered, it is very difficult to argue that the minimum wage hinders growth in the UK, and although it does cause some deadweight loss in the labour market, its overall impact on productivity and consumer spending outweighs this massively. While stimulating growth is neither the purpose nor the primary effect of a minimum wage, the implications it does have on growth are mostly positive and lead to an overall improvement in the economy.
2.2
The minimum wage’s impact on unemployment
The unemployment effects of a minimum wage are some of the most debated topics in economics (Nuemark and Wascher, 2008). Conventional theory is clear on the matter: raising the minimum wage should increase unemployment, but many modern studies have used empirical evidence to argue that the size of this increase is negligible. The impact on unemployment among low skilled workers is also the most important issue in analysing the effectiveness of a minimum wage. If the policy results in too many job losses, it ultimately does more harm than good. This section of the dissertation will seek to discover the size of the impact the minimum wage has on unemployment in the UK, and consider the policy based upon this. Before looking at the effects of the minimum wage, it is important to define certain terms. Unemployment is defined in economics as being willing and able to work at the going rate but unable to find a job despite an active search. Employment, however, is defined as whether a person has a job or not. On graph (b) from figure 1, all the people willing to work the hours between Q1 and Q3 are technically unemployed, but since the people between Q2 and Q3 were unwilling to work before the introduction of the minimum wage, the drop in employment is only equal to the space between Q1 and Q2. Both measurements are useful when analysing the minimum wage, but it is important to remember that the unemployment statistic can be misleadingly large at times.
101
Made with FlippingBook interactive PDF creator