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Is it right to raise the minimum wage in the current climate?

The government has acted on the recommendations of the Low Pay Commission, which is an independent body, to raise the minimum wage for adults by 2.5% to £6.08 per hour. This rise will take place in October.

The minimum wage for those aged 18 to 20 will go up by 6p to £4.98 per hour, and the rate for 16-17 year olds will rise by 4p to £3.68 per hour.

The minimum wage was first introduced in 1999 at a rate of £3.60 per hour for adults. At the time it was felt that this would have a major effect on unemployment, with many businesses being forced to lay off workers as a result of this enforced increase in costs.

Over the years, firms have largely become reconciled to working within this framework, even though it brings a degree of inflexibility into the working of the labour market. In 2009, the Low Pay Commission found that although there was considerable impact on businesses from the minimum wage, with over 50% of companies surveyed saying that they have had to raise their lowest pay rates in line with minimum wage rates, there was little evidence of any adverse effect on unemployment.

It has been suggested that the minimum wage may in fact raise worker productivity which will actually improve the demand for labour, with rising wages at this level leading to increases in employment.

The lowest paid can expect a bit more in their wage packets from October - assuming that they keep their jobs.

There is also the argument that the minimum wage narrows wage differentials with other workers who are earning above the minimum wage and may put pressure on firms to raise wages right through the organisation, to maintain these differentials. However, with earnings increases being so low at the moment, this is unlikely to happen this year.

The minimum wage tends to impact mainly on smaller firms, as many of the larger firms that employ relatively unskilled labour, such as the big supermarket companies, already pay above minimum wage.

Some business groups reacted to the increase by claiming that it would have an impact on employment at a time of rising unemployment, especially for young people where unemployment is already very high. Others felt it was a moderate increase in the circumstances.

The Business Secretary, Vince Cable, said that 890,000 people would benefit from the increase.

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Posted in labour markets, Minimum Wage

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