What if there was no minimum wage?

Economy & Politics | Employment & Skills | Reports

Over 20 years on from its introduction, BL explores the benefits of the National Minimum Wage and looks at whether it is the panacea for poverty.

When and why was the National Minimum Wage introduced?

The National Minimum Wage (NMW) was introduced on April 1999. Its objective? To combat poverty, by protecting workers on a low wage.  Its introduction was expected to benefit over two million lowly paid workers, with more than half of them being employed in the service sector. At the time of its launch, many feared that the initiative, would create more unemployment, as businesses would be forced to employ fewer people.

What is the current national minimum wage?

To qualify for the National Minimum Wage, you must be of school leaving age. To qualify for the National Living Wage (NLW), you must be at least 25 years old. Apprentices qualify for the apprentice rate, if they are either aged 19 or under, or aged 19 or over, but in their first year of their apprenticeship. If an apprentice is over 19 years of age, and in their second year, then they qualify for the National Minimum Wage rate that their age group falls within.

Below show the National Minimum Wage rates at decade intervals, and the new rate for 2020

Year Apprentice Under 18 18-20 21-24 25+ (NLW)
April 2020 £4.15 £4.55 £6.45 £8.20 £8.72
April 2019 £3.90 £4.35 £6.15 £7.70 £8.21
October 2009 N/A £3.57 £4.83 (18-21) £5.80 (22+) N/A
October 1999 N/A N/A £3.00 (18-21) £3.60 (22+) N/A

Why have a National Minimum Wage?

Supporters in favour of a National Minimum wage argue that it can only have a positive effect on the local economy.  Simply put, if people have more money in their pocket, they can spend more. It is also argued that the National Minimum Wage can help reduce unemployment, with higher wages acting as an incentive to encourage people to enter the workplace.

This, in turn, proponents of the efficient wage theory argue, leads to improved productivity – as an employee who is paid more is less likely to want to lose their job, therefore will work harder to keep it. But perhaps the biggest argument for favouring the NMW is that it reduces poverty. By increasing the wages of the lowest-paid, workers will have more income. This additional income will also aid better nutrition, which ultimately leads to better health.

What effect does the National Minimum Wage have on small businesses?

Undoubtedly, the next rise in NMW in April 2020 will affect some smaller businesses. Indeed, some may struggle to balance the effects of this increase, against their already massively squeezed profit margins. Many SMEs opt to absorb the cost within their business, whilst others are forced to increase prices, in an already competitive marketplace. However, not every business has a less than positive outcome to the NMW. In fact, some businesses favourably report that the introduction of the NMW has improved both productivity at work, and staff retention. Another factor to consider, is higher pay attracts higher-quality candidates.

Is there a downside to adopting a National Minimal Wage?

Advocates against adopting the National Minimal Wage reason that rather than generate employment, it can lead to increased unemployment. The argument is that businesses will look to outsource business abroad, where employment costs are lower, rather than pay government-enforced minimum wages – call centres in India and the Philippines being such an example. In the same vein, more businesses might turn to cheaper automated alternatives, rather than paying for human labour. Undeniably, you only have to look at the growth in self-checkouts at supermarkets and fast-food restaurants, to see this practice already starting to take hold.

To implement a National Minimum Wage or not?

Today, most countries (including LDCs) have some form of National Minimum Wage scheme. Australia currently tops the charts, requiring workers to be paid a minimum of $19.49 per hour (UK equivalent £9.92).  However, there are still some major players who have chosen not to adopt this system. Sweden, Norway, Denmark, Switzerland, Singapore, Hong Kong and Austria, to name a few, don’t have a National Minimum Wage.  Denmark and other Nordic countries, for example, prefer instead to favour a system of collective bargaining, whereby bosses and employee representatives, negotiate their own deals on pay and other working conditions.

It can be shown that countries who adopt collective bargaining, have a lower proportion of low paid workers. For example, in 2018, both Denmark and Italy (where 80% of their workers are covered by their collective bargaining systems) ranked among the highest wage floors. Even the lowest-paid Danish employees receive an average of approximately £13 an hour – considerably higher than the highest salary covered under a National Minimum Wage scheme. It is also interesting to note that seven out of the 10 happiest countries in the world do not adopt a nationally backed minimum wage scheme either.

What if there was no national minimum wage?

There is an argument that if the minimum wage was scrapped tomorrow, it wouldn’t change anything, as traditionally once a wage level has been set, it doesn’t tend to get lowered.  However, this would arguably only apply to existing businesses. Any new start up business could, in the absence of an alternative system, set their own wage. This could have devastating consequences, today, which already finds so many people living in relative poverty.

Until a robust alternative is presented to replace the NMW, British businesses need to keep a close eye on whether salaries and wages are in-line with the latest legislation. Failure to pay the correct minimum wage, can result in a £20,000 fine per employee underpayment. In 2018, 239 companies who failed to pay the correct minimum wage were fined and named and shamed. Leading names included, Bristol City FC, Sussex Cricket Club, Odeon and UCI cinema group, and the Card Factory. This practice of publicly naming offenders is set to be resumed under revamped rules.

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