FOR AND AGAINST

Minimum Wage

Aim

The main aim is to reduce poverty and to reduce pay differentials between men and women.

Other aims include reducing the exploitation of low paid workers and improving incentives for people to actively look for paid work in the labour market. This should cause an expansion in the size of the economically active labour force.

For

1. Higher tax revenues from increased earnings of those in low paid jobs. As earnings rise, people pay more in income tax and national insurance contributions.

2. State benefits would cost less - less need for benefit "top-ups" such as income support and council tax benefit- because those in work who are directly affected will see their gross weekly earnings rise

3. A fairer distribution of income across the population - low pay is a major cause of poverty and social injustice and can contribute to rising levels of crime and social deprivation. The argument is that employers should be capable of providing their workers with a fair days pay.

4. The experience of other countries show that minimum wages can work with minimum effects of employment and competitiveness of domestic firms

5. Firms will have an incentive to raise the productivity of employees if they must pay the minimum wage. This may lead to increased investment in the human capital of the workforce

6. Higher pay may reduce labour turnover and worker absenteeism and increase the motivation of those workers affected - leading to an increase in efficiency. In low paid jobs, rapid labour turnover can be expensive for employers.

Industries most affected by the national Minimum Wage In October 1999, a report from the Confederation of British Industry

(CBI) gave qualified support to the National Minimum Wage. Some of the key points in the report were as follows:

"Not much evidence of a significant impact on employment or unemployment".

"No noticeable blip upwards in average earnings". The impact on inflation "unlikely to be significant".

The minimum wage has made some impact on wage differentials leading to higher rates for other workers and not just the low paid. But this only applies to 13 per cent of companies.

The introduction of a lower �3 an hour development rate for 18-21 year olds has proved effective for small companies. The exemption of under-18 year olds from any minimum wage has proved "useful and valuable" to employers.

Some companies have modernised work practices by making staff more multi-skilled. They rotate them more between jobs to offset the cost of the minimum wage

Against

1. A NMW set above the free-market wage for certain groups raises the marginal cost of employing people - so firms will cut jobs, reduce hours of work for employees and unemployment will rise

2. Other workers will demand higher wages to maintain pay differentials (this is known as "pay leap-frogging"). An increase in the total wage bill may cause cost-push inflation and damage the price competitiveness of UK producers in international markets

3. Young and low-skilled workers will lose out - firms will tend to employ older workers whose experience is greater. There will be a substitution effect that works against younger participants in the labour market

4. Some firms may cut back on investment in worker training because of falling profits

5. A minimum wage will not ease poverty because many poor households do not have a low-income earner. Poverty is concentrated in those groups where no one is in paid employment. A minimum wage has little direct effect on these households - better to introduce a minimum income guarantee

6. A NMW does not take into account regional differences in cost of living and will have a distortionary effect on the way the UK labour market works