National Minimum Wage (NMW) As A Force To Pay Not Less Than A Standardized Base Remuneration

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A national minimum wage (NMW) is adopted by a large majority of countries forcing employers to start paying employees no less than a standardized base remuneration. On average, the national minimum wage increases annually, with the United States of America being an exception (Grugulis, 2019). This legislation poses an ongoing debate. The government, economists, politicians, employers and employees amongst others all have clear differences of opinion regarding the introduction and raise of minimum wages. With that said, this essay will shed light on several benefits and downsides to an NMW. It will firstly analyse its impact on employment and the gender pay gap. The following will then explore the workers’ inequality of bargaining power, the relationship between an NMW and productivity, and lastly, its influence on employers and businesses.

Pay serves as a financial incentive as well as a form of compensation for the employee’s services to the employer. The amount a worker is paid holds great influence. In fact, pay defines a worker’s standard of living. It satisfies the basic need for survival and security; it allows workers to pay their rent, clothe themselves and provide for their families. With that said, an increase in the legally set minimum wage simply symbolizes more money for workers (Deakin and Green, 2009). To contrary belief, these improvements in living standards have not generated unfavourable economic results (Low Pay Commission, 2011; Bach and Edwards, 2013). In fact, this increase encourages the low paid to purchase things to satisfy their needs, wants and desires all while keeping up with price inflation. This in turn strengthens the local economy as people are spending their earnings due to their increased purchasing power (Grugulis, 2017). That spending pushes employers to hire additional workers, consequently creating more jobs and increasing employment rates. Further supported by the Low Pay Commission (2011), it is argued that minimum wages have not threatened employment to any ‘significant degree’. In fact, Card and Krueger (1995) compared employment rates at fast-food restaurants in neighbouring states: New Jersey and Pennsylvania. The former had just increased its national minimum wage from $4.25 to $5.05 whereas the latter did not have a national minimum wage. This study concluded that higher wages actually increased employment (Card and Krueger, 1995). Simultaneously, according to Deakin and Green (2009), there is little evidence demonstrating any negative impacts on employment caused by a growth in minimum wages. As Grugulis (2017) suggested, a national minimum wage may actually entice individuals to re-enter the employment. Many vulnerable groups (e.g. single parents) cannot afford to participate in the labour market seeing as the expenses of childcare outweigh their income (Grugulis, 2019). Therefore, an NMW attracts a more diverse population into the workforce.

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Following, the impact of an NMW on the existing discrepancy in pay between men and women cannot be overlooked. To elaborate, women are paid less than men based on assumptions that women possess inferior qualifications than men, choose career paths (e.g. teachers and registered nurses) that are not lucrative and take career breaks or work part-time for care and responsibility purposes (Grugulis, 2017; Grugulis, 2019). Though the United Kingdom introduced the Equal Pay Act 1970 which prevents employers to treat or pay men and women differently in regard to equivalent work positions, women continue to be victims of prejudice and discrimination within the workplace (Grugulis, 2017; Kaufman, 2009). Following this legislation, the UK implemented the National Minimum Wage Act 1998 (Deakin and Green, 2009). This benefitted and continues to benefit women as it carries the potential to positively influence gender wage equality (Rubery et al., 2005; Dex et al., 2000). In fact, the minimum wage in Poland grew significantly from 2006 to 2010 increasing from 899.0 to 1,317.0 Polish zlotys per month (Country Economy: Poland National Minimum Wage). Majchrowska and Strawinski (2018) found that this growth lessened gender wage gaps among young workers. In addition to advantaging women, this legislation helps ethnic minorities, part-time and low-skilled workers as well as single parents. Correspondingly, effects on experienced and educated workers are negligible (Majchrowska and Strawinski, 2018). Essentially, the NMW plays an effective role in narrowing the gender pay gap and helping other vulnerable groups within the workforce. Though this only englobes 10 per cent of employees, the NMW resulted in a “stagnation of pay inequality at the bottom end” (Bach and Edwards, 2013: 259).

Low pay leaves workers with little to no bargaining power at all. In that case, a legally set minimum wage prevents employers from enforcing pay rates below the wage floor. It strips them of their power advantage in regard to wage determination. Collective bargaining can be defined as the negotiation of wages and working conditions by trade unions for companies or sectors of an industry (Grugulis, 2019). With collective bargaining influencing only six per cent of companies in the private sector in the UK, workers remain at a disadvantage (Grugulis, 2019). Collective bargaining increases the power of workers by having a voice and negotiating their terms and conditions of work. Therefore, with the lack of such, workers are pushed aside reinforcing the idea that there is an asymmetry of power between employees and employers. This results in further wage polarisation as the few at the top of the hierarchy take a greater portion of the benefits and financial rewards (Grugulis, 2019). Therefore, minimum wage legislations restrict “employers and the rich [to] dominate” (Kaufman, 2009: 309). Overall, an NMW can result in greater collective bargaining as well as less wage polarisation.

Moreover, a minimum wage legislation has the potential to increase productivity. When labour is fairly inexpensive, there is no incentive for employers to invest in machinery, technology or worker training (Grugulis, 2019). Low wages and poor working conditions result in inefficiency. However, by introducing or raising the NMW, it is likely to create a ‘shock effect’. A shock effect occurs when there is an increase of labour cost, forcing firms to substitute capital for labour, and to invest in human capital in order to counteract the wage inflation (McLaughlin, 2009). The shock effect will result in firms taking a high-road approach to competitiveness (McLaughlin, 2009). In other words, higher wages may encourage firms to invest in training in hopes of raising productivity. This would mean fewer but more highly skilled workers. Michael Burtov, CEO at Cangrade, asserts, “Salary should be considered an investment, not a cost” (Angeles, 2013). In doing so, there will be a reduction in turnover. However, taking this high-productivity road to competitiveness is a lot easier said than done, especially if firms do not have the means to invest in training.

Focusing on the workers, a national minimum wage has numerous advantages. However, there are also several drawbacks of a legally set minimum wage. Seeing as employers benefit greatly from low wages in labour markets, a legally set minimum wage can negatively impact them (Kaufman, 2009). Employers who are unable to financially adjust to the national minimum wage will be forced to lay off employees. Thus, some will find themselves unemployed even though some employees will be paid more as a result of the NMW. To continue, if a firm requires low-skilled workers to manufacture the goods, outsourcing labour to countries with lower minimum wage legislations may be a cheaper alternative (Grewar, 2018). According to Elder (2016), over 70 per cent of firms in the United States would increase contracting and outsourcing if the NMW rises. This may also entice businesses to invest in technology and machinery rather than labour limiting job availability.

From an economic point of view, prices will increase in order to justify the cost of increased wages. This will overall raise the cost of living (i.e. inflation) which will create a further need for minimum wage increases. Therefore, set minimum wages and the expectation to raise them lead to a vicious circle.

Ultimately, a national minimum wage puts more money in the pockets of poorer people who will have the tendency to spend it boosting the local economy and creating jobs. In other words, this law does not reduce employment nor does it hinder the economy. Furthermore, this legislation protects workers by preventing employers of setting irrationally low wages. By making labour more costly, firms are likely to invest in technology, expensive machinery and human capital (i.e. training) which has the potential to increase productivity. On the other hand, a national minimum wage can be detrimental to employers as they are forced to increase wages. This can result in cutbacks or outsourcing of cheaper labour.

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