Numerous research studies have been conducted on the effects of increasing the minimum wage for low paid workers. These findings are part of an ongoing debate amongst economists on the rationale of increasing the minimum wage and the likely effects on a country’s economy.
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Amidst the debate, there seems to be a general consensus that increasing the minimum wage for low wage earners does not have any effect on employment rates. However, this rule seems only applicable selectively, since there are indications of job losses within the British home care sector after the introduction of the National Minimum Wage.
This paper evaluates the theoretical assumptions regarding the effects of the introduction of the National Minimum Wage within the British home care sector.
According to Metcalf (2004, pp. 84-86), the National Minimum Wage was introduced in 1999 with the aim of protecting about 1.8 million workers from exploitation by employees. Metcalf (2004, pp 84-86) further asserts that concerted efforts have been made since then to progressively increase wages paid to employees per hour.
Initially, the minimum wage increased at the same rate as the Average Earnings Index in the late 1990s. However, at the turn of the 21st century, the rate at which the National Minimum Wage grew started accelerating.
By the end of 2004, the National Minimum Wage had doubled the Average Earnings Index (Metcalf, 2004, pp 84-86). In this case, employers were required to pay their employees a minimum of £ 4.85 per hour. A rise in payments rates had a significant direct impact on the earning at “the bottom of the pay distribution” (Metcalf, 2004, pp 84-86).
This however, did not have any impact on the average employment rates. However, minimum shocks were felt across the British homecare sector.
Borjas (2010) focuses on labor economics especially with regard to the demand and supply of labor, and how it is affected by an increase in minimum wage. In his book, Borjas (2010) agrees with Metcalf (2004) and argues that there might be signs of increased unemployment as a result of an increase in minimum wage.
However, this creates a false impression since on average there is no indication of rise in unemployment resulting from an increase in minimum wages. For instance, Borjas (2010, pp 126) argues that teenage employees did not lose jobs in a majority of states such as California when the minimum wages were introduced.
However, Borjas (2010, pp 127) further compares the increase in minimum wages between several States and notes that States such as New Jersey increased the minimum wages beyond the minimum rate required by the federal government. As a result, unemployment increased slightly in States such as Pennsylvania. However, this did not have any effects on the over-all unemployment rates.
Borjas (2010) and Metcalf (2004) focus on different markets but draw similar conclusions. In their works, the two authors stipulate that there are minor negative shocks in terms of job losses in given industries that lie within certain geographical and economic regions.
However, such job loses do not have any significant effects on the average rate of employment due to a combination of factors. Borjas (2010, pp 118) cites the demand and supply of labor economics as one of the factors which mitigates the expected loss of jobs as a result of increase in minimum wage.
Additionally, Metcalf (2004, pp 84-86) adds that the implications of increasing the minimum wage are offset by a reduction in working hours, incomplete compliance with the National Minimum Wage requirements , enhanced employee productivity through training as well as reduced profitability from firms.
Metcalf (2004, pp 84-86) asserts that the increase in the minimum wages has significant effects on reduction of employment opportunities within Britain’s homecare care sector.
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Such findings are also enumerated by Machin and Wilson (2004). According to Card and Krueger (1995, pp 1, 5) any increase in minimum wages has an immediate and direct impact on the average employment levels for low wage earners. This is because if wages are increased, unskilled laborers will be priced out of the job market.
This is necessitated by the fact that those employees whose skills only qualify for wages below the required minimum wage become unemployable. As such, they either become unemployed or are completely ousted from the labor market (Card and Krueger, 1995, pp 6). Such machinations are explained through the demand supply of labor model, as described in the diagram below.
Source: Card and Krueger, 1995, pp 6
The effects of the National Minimum Wage are also analyzed using the difference-in-difference model. The difference-in-difference model uses a cross sectional comparative approach.
The effects of introducing a variable are analyzed by evaluating the conditions before and after the introduction of the said variable. Notable effects are then recorded (Card and Krueger, 1995, pp 12).
Card and Krueger‘s (1995) asserts that some employees lose their jobs as a result of an increase in minimum wages. These findings seem to concur with Machin and Wilson (2004) findings on studies conducted within Britain’s home care sector.
Machin and Wilson (2004, pp 102) begin by asserting that, generally, the increase in the rate of minimum wages earned by minimum wage earners has significant positive effects to the economy, the employer as well as the employees.
Surveys conducted on the level of employment rates before and after the introduction of the National Minimum Wage did not indicate any negative effects on the employment levels. On the contrary, data studied indicate that on average employment rates had shown an upward trend in before the introduction.
Additionally, the upward trend in employment levels continued during the post introduction era. Further upward adjustments to the minimum wage did not show any downward shift in employment rates.
Furthermore, wages earned by a significant number of minimum wage earners, in a majority of the sectors within the British employment industry increased. As a result of the notable positive effects, the minimum wage was revised upwards several times (Machin and Wilson, 2004, pp 102).
While this had major economic benefits, the rise in minimum wages had negative effects on some sectors which are susceptible the dangers of altering minimum wages (Machin and Wilson, 2004, pp 102).
This implies that employees who were previously employed in sectors vulnerable to adjustments of the minimum wage lost jobs immediately the National Minimum Wage was introduced. Such sectors include the British homecare sector. The sector was chosen for this study for a number of reasons.
To begin with, the sector pays some of the lowest wages in Britain. The sector also employs a sizeable number of employees, thus data studied would have provided valid results. Additionally, the sector has a majority of nonunionizeable employees (Draca, Machin, Van Reenen, 2006, pp 10).
According to Machin, Manning and Rahman (2003, pp 154) the introduction of the National Minimum Wage had a series of effects which culminated in loss of jobs within the British homecare sector. National Minimum Wage led an immediate increase in the wages earned by a majority of homecare employees.
Using the difference-in-difference model, Machin and Wilson, (2004, pp 102, 103) compared the amount of wages earned before and after the introduction of National Minimum Wage and found major differences. During the pre introduction period (Machin and Wilson, 2004, pp 102) found out that the average employee within the British homecare sector earned below £ 4 per hour.
However, studies conducted post introduction period indicate that the minimum wage for employees within this sector were kept at £ 4.85 per hour. This implies that the wage distribution was readjusted downwards. Consequently, homecare employers had to face increased wage bills.
This had positive effect since it effectively reduced wage inequality. However, such effects were significantly diluted since homecare owners had to readjust to accommodate reduced profits.
As found out by Machin, Manning and Rahman (2003, pp 155) and Machin and Wilson (2004, pp 104) the National Minimum Wage had a direct impact on the number of hours per employee. Employers, to curtail the increase wage bill, had to develop ways to maximize profits.
As such, labor utilization was reevaluated so as to increase productivity. One such method was to award the minimum wage per hour, but reduce the amount of hours worked. This indicates that during pre introduction period, employees worked for longer hours while during post introduction period, employees worked shorter hours.
Machin and Wilson (2004, pp 104, 105) further postulates that the increase in wages and the subsequent reduction in the number of hours worked had a direct impact on the levels of employment. Before the National Minimum Wage was introduced, any individual was employable within the British homecare sector.
However, post introduction survey indicates that only those employees with skills that warranted the minimum wage requirement qualified for jobs. As such, there was a slight increase in the levels of unemployment during the post introduction period.
Machin and Wilson (2004) uses the difference-in-difference model which utilizes the cross sectional methods of study. This implies that the study was limited to a specific time. As such, the long term effects of the introduction of the National Minimum Wage cannot be ascertained.
This necessitates a longitudinal study, which would study the whether the introduction of National Minimum Wage has any long term effects on unemployment. Additionally, Machin and Wilson (2004) survey focused on the British homecare sector, implying that the results are only applicable to this sector. As such, further studies need to be conducted in other sectors to validate these findings.
The introduction of the National Minimum Wage had a number of interrelated effects. The national minimum wage resulted to an immediate rise in wages earned by low wage earners. This lead to an immediate reduction in hours worked for every employee.
In general, this did not have any significant impact on employment. This is because the demand of labor is influenced by a number of factors.
However, there are some sectors which are vulnerable to adjustment in minimum wages. This includes the homecare sector, which recorded slight increase in unemployment rates. However, further studies needs to be conducted to validate whether such effects are long term or short term.
Borjas, G., 2010. Labor economics. London: McGraw-Hill/Irwin
Card, D., & Krueger, A., 1995. Myth and measurement: the new economics of the minimum wage, Princeton: Princeton University Press, pp. 1, 6-7
Draca, M., Machin, S., & Van Reenen, J., 2006. Minimum wages and firm profitability. Web. Available from http://ftp.iza.org/dp1913.pdf
Machin, S., Manning, A., & Rahman, L., 2003. Where the minimum wage bites hard: introduction of minimum wages to a low wage sector. Journal of the European Economic Association, Vol. 1, No. 1, pp. 154-180
Machin, S., & Wilson, J., 2004. Minimum Wages in a low-wage labour market: Care Homes in the UK. Economic Journal, Vol. 114, pp. 102-109
Metcalf, D., 2004. The Impact of the National Minimum Wage on the pay distribution, employment and training. Economic Journal, Vol.114, pp.84-C86