Shocking Truth About Minimum Wage

Published on by Sevi Fattahpour


Double dip recession, 25% youth unemployment, alarming levels of national debt, out of control government spending, rise in the cost of living etc. It just feels like everything is getting out of control at the same time. So what's the solution, what should we do? Should we ask for more government regulation and interference for a short term “solution” or should we deal with the issues deeply for a long term solution?

 

So what's so bad the so called “Short term solutions”, surely they would solve some of the issues for the time being, right? Wrong, in fact they worsen the situation! Lets look at an example, “Future Jobs Fund” which was a program to put young people back to work. This scheme used to cost around £5,000-£6,000 per taxpayer and what was the outcome? At the end, the majority of youth didn't get a real, permanent job and in addition to that, £5,000-£6,000 per taxpayer was also wasted. But let's look at why Future Jobs Fund was started in the first places. It was started because government wanted to solve a previous government failure which eventually failed again. Since the introduction of minimum wage, many low paid workers lost their jobs and apart from that, Young people today can't find a job because they don't have enough skills and experience to be worth the minimum wage, therefore they don't have the opportunity to get into the job market, acquire skills and experience so they simply stay unemployed. Young people are discriminated against because of their lack of skills and experience so they just can't get a job because of that. This is how government failed by concentrating too much on the intention rather than the outcome.

 

If there was no minimum wage, employment would rise, people would have the opportunity to learn some new skills, get some work experience and walk up the income ladder. The myth is that low paid workers always receive a low pay, but that's wrong. The reality is that as people learn new skills and increase their productivity, their employer would have to increase his wages and if they don't someone else would employ this worker because businesses compete with each other, that’s why a business cannot pay his worker 50p an hour. His competitor would pay the worker a higher wage to attract the productive worker. You might ask why would they compete for workers, well because businesses employ workers since workers produce value for the business and a productive worker, creates a higher value so they try to either keep the productive ones or attract new workers.

 

Another problem with the minimum wage is that it eliminates certain category of jobs. These jobs are the ones that are actually not worth the minimum wage e.g. answering emails for a small business which could be worth £4/per hour or a cinema usher which could be worth £3/£4/ per hour. So suppose the usher only bring £4 to the cinema owners pocket but by law, the cinema owner has to pay him £6.08 an hour. This is a £2.08 loss for the cinema owner for every hour that the usher works, so this job will be eliminated as a result. These jobs cost more than they produce for the business (due to minimum wage) so therefore there is no point in employing them because they create losses for the business.

 

 

At this point, 2 issues will invade your mind:

1)Fine, it creates more jobs if we scrap NMW but these workers can't afford to pay for their necessities due to a rise in the cost of living

2)Even though you said about competition between businesses, I still think workers get a low pay

 

Lets look at the first issue. Less than 10% of our workforce receive Minimum wage and the other 90% have their wages/salaries determined by market forces and the 10% who receive minimum wage “produce/work in the production process” of the necessities of the other 90% and themselves of course. So because of minimum wage and lots of regulatory burden imposed by the government, labour cost a lot to the businesses so they have to compensate this by charging higher prices which will lead to a rise in general cost of living. For instance, If Tesco was allowed to pay a lower wage to its staff, Their would be a fall in the price of Tesco products. Now you might say, “No way, they won't pass the lower cost to their customers, they will just keep the extra profit”, again, Wrong! Remember, they face fierce competition from other supermarkets such as ASDA, Morrisons etc and if they don't they will simply lose their customers so they will make their prices cheaper to gain customers, otherwise they won't exist! So now, food costs less and so on. This applies to other sectors of the economy too. Also another reason for high prices in the UK is the low productivity of our workforce and guess why is that? Correct, it's because of minimum wage. So why does it happen, what does minimum wage have to do with productivity? If a worker knows that no matter how much he produce per hour, he will still get the minimum wage,thus he will lose the incentive to be productive so he will be less productive. whereas if his hourly wage was determined by how much he produces per hour, he would have lots of incentive to be productive in order to earn a higher wage. This is why countries like china have high productivity. So by scrapping minimum wage, productivity will rise, thus prices will fall as lower cost of production/preparation will be spread over the number of units and at the end, cost of living would fall.

 

Now lets turn to the second issue.”Scraping minimum wage might lead to greedy employers paying their workers wages as low as 50p an hour”. That’s simply not true! Businesses can't do that because they will lose their worker to their competitor and they don't want that because workers bring value to business and the higher their productivity, the higher the value they bring in to the business so if a worker is productive and his/her employer doesn't pay her enough, she will offer her labour elsewhere so either his/her current employer will pay her what she deserves or someone else will. This is how real wages will rise and the key to it is competition, not regulation.

I have gathered some information from big pizza franchises who compete with each other in every aspect: “Domino's Pizza” & “Papa Johns Pizza”. I walked into a number of their stores and asked them these 3 questions:

  1. How much would you pay your current workers if the minimum wage was scrapped?

  2. Would you employ more workers if the minimum wage was scrapped?

  3. Would you employ young and inexperienced people with no or little skills?

 

The answers would surprise you because these are big companies and you might think they will exploit their workers so badly and pay them 30p an hour. True, they might want to do that but they can't because of the fact that they have lots of competition.

Now lets look at the answers. To the first question, most of them said depends but if they aren't as productive, we would pay them around £4-£5 and if they are very productive, around £6-£7(More than the NMW!){This gives incentive to low productive workers to become productive}

To the second & third question, they all gave me 100% yes. Because if they said if they employ an inexperienced worker, they are likely to make a loss on that worker but they all agreed that as they gain skills, their pay would rise from whatever it was at the beginning. So as you can see, competition is even stronger than government regulation.

 

So let's scrap the minimum wage, get young people into the job market, increase the workers productivity and let them determine their own wage. Remember, if you reward the best, you get two thing, one everyone want to become the best to get that reward or two the person who is at top will do its best to stay there, this way everyone wins and others will benefit.

 

A recent statistic showed that since 1990 cost of living rose by 67% but minimum wage only rose by 21%. People want the government to increase minimum wage so their wages can catch up with the cost of living but this will just worsen the situation. How? The more you increase minimum wage, the higher the living costs will get and this will never stop, believe me, if you double the NMW, the cost of living will triple.

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