what does one percent of wage growth do to gnp
In both the UK and US, politicians are proposing pregnant, to a higher place-aggrandizement increases in the minimum wage. The US is proposing an increase from $7.50 to $15 past 2024. The arguments for raising the minimum wages include – reduced in-work poverty, a reduction in inequality, an incentive to increase labour productivity and higher wages leading to increased economic growth. On the negative side, increasing minimum wages as well fast could cause a rise in business costs, a rise in unemployment, and college prices for consumers – problems exacerbated in depressed, low wage sectors and regions.
Pros of raising the minimum wage
Employment effects negligible. Gratis market economists, like M.Friednam feared the introduction of a minimum wage would cause unemployment because in competitive labour markets college wages atomic number 82 to less demand. Still, there is significant testify to dispute this. Since 2010, the Britain minimum wage has increased far above the aggrandizement rate – from £5.93 to £8.21 (27% increment).
U.k. Minimum wage
United kingdom employment rate %
In the catamenia (2010-2019), employment has increased sharply – despite significant increases in the minimum wage. A study by the Low Pay Commission into 20 years of the United kingdom of great britain and northern ireland minimum wage found no stiff prove of falling employment due to minimum wage.
"Since 2000, nosotros have commissioned over 30 research projects… overall none of the enquiry that nosotros have commissioned has shown strong evidence that minimum wages have led to falling employment."
Depression Pay Commission on history of minimum wage and its furnishings, 2019
It is not just the U.k., but a comprehensive United states of america study into the upshot of raising minimum wages establish a like negligible effect on employment.
"Overall, these findings suggest that the level of minimum wages that we study—which range between 37% and 59% of the median wage—have notwithstanding to accomplish a point where the job losses become sizable."
(NBER Working Paper No. 25434, Effect of minimum wages on low wage jobs, Jan 2019)
Counterbalance to monopsony. In the real earth, labour markets are not perfectly competitive. Employers have a pregnant degree of monopsony power. This ways they are able to pay wages below the equilibrium and take a higher share of profit. This is why increasing the minimum wage is compatible with the empirical evidence of no or little fall in employment.
Productivity increases. A rise in the minimum wage creates an incentive for firms to invest in automation and increased labour productivity. (For example, a switch to cocky-service tills, increased self-service at restaurants.) This investment will help increment overall productivity in the economy and enable firms to exist able to afford the wage increases. Information technology shifts the economy to exist less labour-intensive. In that location is some empirical bear witness that an increase in the minimum wage leads to fewer hours worked as firms seek to get a greater return from labour. Productivity growth is a key factor in determining the long-run rate of economical growth.
Reduces labour market turnover. A college minimum wage reduces labour market turnover. Workers have a greater incentive to stay in a job where they go ameliorate paid. Similarly, firms accept more incentive to train higher-paid workers. Lower labour market turnover helps to reduce the costs of firms.
Reducing in-work poverty. In contempo decades, we have seen low wage growth, yet living costs, especially rent has been rise above inflation. This has led to a squeeze on living standards for those on the lower-income spectrum. Many western economies have also seen a growth in inequality with the gap betwixt high-income earners and low-income earners growing. One written report in California found that:
"Our estimates suggest a 10% increase in the minimum wage would reduce household poverty rates by 0.vii to 0.9 percentage points in the highest touch areas,"
Anna Godøy and Michael Reich. (2019). "Minimum Wage Effects in Depression-Wage Areas". IRLE Working Paper 106-19r
Low-paid need the protection of the minimum wage. In recent decades, we have seen labour markets change and go more than flexible – with a growth in role-fourth dimension, temporary piece of work and weak trade unions – therefore low-paid workers find it difficult to employ collective bargaining to gain wage increases, and it is like shooting fish in a barrel for firms to ignore wage demands. Therefore a minimum wage is playing an increasingly important role in protecting the living standards of the low-paid and minimising the gap between rich and poor. This has boosted benefits for maintaining a more cohesive gild and a sense of fairness.
Spill-over benefits. Most of the benefits of the minimum wage occur to the lowest-paid, just there can as well be benefits to those who earn only to a higher place the minimum wage.
"For a wide range of lower-skilled workers, including those who make up to $5 an hour more than than the new minimum"
The Effect of Minimum Wages on Low-Wage Jobs: Doruk Cengiz, Arindrajit Dube, Attila Lindner, Ben Zipperer (Jan 2019) NBER
Cons of raising the minimum wage
Negative employment furnishings. Previous increases in the minimum wage accept been mostly absorbed by the economy without pregnant negative impacts on employment. However, there is a tipping point at which increases in the minimum wage volition have a negative effect on employment. In detail, if minimum wages are increased over 60% of median wages, there is a concern that at this level, firms will not be able to blot all wage increases through price increases and productivity gains, and therefore employment volition fall.
The problem is that previous success in raising the minimum wage is encouraging a rapid increase in minimum wage above a sustainable rate of increase.
Higher prices. An event of college minimum wages is that firms respond to an increase in costs by passing some of the costs onto consumers. Restaurant prices in California accept increased as a event of the ascent in the minimum wage. A written report looked at the effects of a 25% minimum wage increase in 2013 in the area of San Jose, California.
"Their findings suggest that nearly all of the cost increase was passed through to consumers, as prices rose 1.45% on average."
SYLVIA ALLEGRETTO AND MICHAEL REICH, ILR Review, 71(one), January 2018, pp. 35–63
Many labour-intensive industries, such every bit hairdressers, cleaners and health intendance workers will invariably see a rise in wage costs and prices for consumers.
- In evaluation, whilst concern may experience higher prices, if all restaurants increment price together, demand may prove inelastic.
- Secondly, although costs may ascent, the minimum wage does increase disposable income of poorest workers. These workers take a higher marginal propensity to consume and then may increase spending in precisely these service sector businesses.
Biggest costs in poor areas A nationwide minimum wage will have a greater touch on on poor areas – regions of high unemployment and low wages. The problem is that a national minimum wage suitable for London may be unsuitable for a more than impoverished area in the north. The effect on unemployment tin be greater in the poorest areas.
Lack of flexibility. In a recession, need for labour falls and there is downward pressure on wages. It is in these moments when the negative effects of a minimum wage on employment are greatest and the costs of a minimum wage highest.
Is automation ever desirable? I event of a minimum wage is to drive gild towards greater automation. This can take benefits, such as greater efficiency, but if we had a society dominated by robots, this would have negative social and emotional effects. A minimum wage could (in theory!) pb to restaurants employing robots to accept out food, but and then we miss out on the personal interaction with humans.
Evaluation
What determines the success/failure of raising a minimum wage?
- How much is the increase? When wages are depression, an increase in the minimum wage may have niggling upshot on employment. Merely, that doesn't mean, in that location isn't a limit where increases in the minimum wage will cause unemployment. The pull a fast one on is finding the optimal level (some suggest a crude rule of thumb 60% of median wages – but more enquiry is needed)
- How rapid is the increase? There is prove that when annual increases in the minimum wage are planned, firms have time to plan – increases in automation, increases in prices and therefore information technology is easier to absorb the increase. The biggest costs come from unexpected one-off rises.
- Exercise firms have monopsony power? If firms have monopsony power and are assisting, so they can afford to pay increases. If labour and product markets are more than competitive, the pressure to cut jobs may be greater.
Related
- Effect of minimum wages on unemployment, growth and inflation
Source: https://www.economicshelp.org/blog/153343/economics/pros-and-cons-of-raising-the-minimum-wage/
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