The minimum wage in
Britain has only risen a quarter, since 2015 (to £8.21) for those who are older than 25 and is about to rise
again. On September 30th, Sajid Javid, the Chancellor, promised to raise the minimum
wage by 2024 to two-thirds median earnings, which would equate to around £9 today. However, in five years’ time, Javid
thinks that it’ll work out to around £10.50 and he wishes to extend the range
to those over 21.
I think
this could have detrimental effects to the British economy for the following
reasons: Higher-paying hourly-waged jobs will decrease in value relative to the
increase in minimum wage and thus give employees incentives to look for other
jobs or not work as hard in their own—as proposed in the Efficiency Wage Theory. This would cause the employers to pay more
for their employees to have them stay. This rise in relative wage would
increase the products prices, affecting domestic and export sectors.
It will
also cost producers and consumers who export or supply domestically, because
the price of the products in the sectors which saw a raise in wage will
increase, raising the revenue earned, thus the rent on capital. To those who
are selling capital (either repossessing or leasing) this is good. However, to
those who are purchasing it or using it to produce goods, this is detrimental
because they will have to pay more. To those who export goods, they will see a
rise in their prices and will pass this along to other countries; Britain,
being the 5th largest economy in the world, will certainly have an impact on world prices and the increase in price for those exported goods would increase
Britain’s TOT, worsening the TOT of countries importing these goods.
Since the world relative price would increase, there would be a corresponding
decrease in demand. This then, would reduce consumer welfare in both Britain and
countries importing these goods because they would have less consumption and
thus less utility.
I
believe that though there might be some winners in this scenario, the majority
will be losers: the world economy will suffer from the rise in wages due to a
higher rental rate of capital and cost of labor. These costs will be passed on
to all consumers, foreign or domestic, causing the TOT of all importing
countries to decrease along with their welfare, for lack of consumption thereof.
Mark, you bring up some really great points here. It may be interesting to discuss how the rent rate of capital is affected by this minimum wage increase a little more. I do agree with you that that Britian's TOT may increase, but due to the increase in prices domestically with the wage increase, it may be plausible to make the assumption that Britain's domestic welfare may go down. Great points overall.
ReplyDeleteMark, I found your analysis to be rather interesting. I had never really thought about how wage played into trade until this class. I, like Matt agree that TOT will increase. The question I would raise is what would this do to Britain's welfare. In the short run it make increase welfare, however in the long run I see it decreasing overall welfare. This brings me to a recent report I saw on the news about a local business in IL who is facing the wage hike there. They reported that they are considering automation to prevent having to pay the wages of people. I see a wage hike as a threat to workers as it just incentives business owners to automate. To bring us back to this international econ course when looking at this issue throughout the world and the effects on trade, I agree 100% with your last paragraph. World relative prices will rise.
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