Pros & Cons #4: The Minimum Wage

The Minimum Wage is something that has often been a focal point of the left vs right debate over economics and the government's role in managing its economy.

So let's have a look at both sides: both at those who say the minimum wage is an unnecessary, harmful form of government interference, and those who say it is necessary for the welfare of the working citizens of developed nations.

PRO: Worker Protection

Arguably the most significant reason for the existence of a minimum wage is the fact that it can prevent the abuse of workers desperate for employment by lean, restrictive employers. People desperate for a job can often be manipulated by employers into jobs in which the employee is strongly underpaid, often resulting in these people falling into poverty despite being employed. The minimum wage seeks to prevent such people falling into poverty, by giving them a wage that is calculated every few years to be supposedly enough to cover living costs for an individual and perhaps one or two dependents.

A study done by David Neumark and William Wascher of the American National Bureau for Economic Research (NBER) concludes that "over a one to two year period, minimum wages increase... the probability that poor families escape poverty" due to the increase in household income post-implementation of the minimum wage.

A higher minimum wage could reduce the need of
food banks like this.

Not only does escaping poverty help those fortunate enough to climb out, though. According to The Centre for American Progress, raising the minimum wage from $7.25 to $10.10 would reduce money spent on federal food stamps by $4.6bn a year, lifting off a great debt on the government.


CON: Shrinking Wages

However, Neumark and Wascher are careful to explain that their findings suggest separate stories for the poorest in society (who will benefit) and the rest- notably those just above the poverty line, who they claim would be harmed by a minimum wage.
An argument exists that the minimum wage could create a 'vortex' effect around the poverty line- while sucking the poorer up to and perhaps over the poverty line, it could simultaneously pull down those above the poverty line.

One could argue that despite the 'spirit' of the minimum wage, that is to raise the living standards of the poor, it could conversely provide a benchmark of acceptable pay for people who should be earning more. A company may reduce the pay it gives to employees to the minimum wage, reducing the income of those perhaps just above the poverty line and according to Neumark and Wascher, perhaps even dropping them below.


PRO: Productivity

Prominent psychologist Ivan Robertson summed this up very simply: "Improved psychological well-being (PWB) leads to a more productive and successful workplace". The link between income and this psychological well-being is further explored in a study by Princeton economists Daniel Kahneman and Angus Deaton- they conclude that, up to an income of $75k, "emotional wellbeing rises with log income". This means that, to an extent, money does often buy happiness- particularly when we're talking about those on the minimum wage, a figure far less that $75k.

Combining the two conclusions of Robertson, Kahneman and Deaton, it appears that the minimum wage's effect of increasing the wages and thus living standards of those below it can indeed have the effect of increasing productivity in the workplace. Wage is ultimately a great contributor to job satisfaction- and the higher the job satisfaction, the higher the likelihood of an employee being enthusiastic in their work, being present when needed and ultimately being more loyal to the employer.


(?): Lost Jobs

The reason why there's a question mark on this one is because this is perhaps one of the most contentious points in the whole minimum wage debate.

Some argue a minimum wage forces businesses to spend more on staff, meaning many will have to reduce staff numbers to keep the wage expenditure from increasing too much. This means fewer jobs, and consequently higher unemployment.

Their historically low pay has left fast food workers
among the most sensitive to any minimum wage regulation.

According to the American Enterprise Institute, this was the case in Seattle in the first half of this year- during which an increase in the minimum wage to $11 was said by many to have been responsible for the post-recession record loss of 1,300 restaurant jobs in the area. Author of the report Mark Perry highlights in particular how 1,000 of these jobs were lost in May alone, following the minimum wage increase in April- "the largest one month job decline since a 1300 drop in January 2009, during the Great Recession".


On the other hand, there is much evidence to suggest the minimum wage has little impact on unemployment levels generally. A famous study by David Card and Alan Krueger from 1990 compared restaurant employment in neighbouring states New Jersey (where the minimum wage was set to rise) and Pennsylvania (where the minimum wage was unmoved). "We find no evidence that the rise in New Jersey's minimum wage reduced employment at fast-food restaurants in the state", the study concluded.

A study in the British Journal of Industrial Relations set out to test the results found by Card and Krueger in 2009, and concluded the same- that they saw "little or no evidence of a negative association between minimum wages and employment".


CON: Price Inflation

Card and Krueger's findings that minimum wages had little effect on employment, however, did not absolve the minimum wage of any negative impact. In fact, upon investigation they concluded that "much of the burden of the minimum-wage rise was passed on to consumers", when restaurants would increase their prices to compensate for higher wage spending.

The idea of price inflation following minimum wage implementation arguably discredits the notion that the minimum wage causes unemployment. Theoretically, it would seem more likely for a restaurant to not risk all the potential issues that come with a shortage of staff, but instead retain staff (on the new minimum wage or above) and instead make the customers pay for the new burden.

Many businesses have laid the blame for price increases on minimum wage increases. One high profile example was Mexican food chain Chipotle, who, following a minimum wage increase in San Francisco, raised the price of their menu on average by 10%. Here in the UK, following the announcement of a new 'living wage' of £7.20 last month, Whitbread (the group including brands such as Costa Coffee and Premier Inn) announced they would be raising prices as a result of the supposedly "substantial cost increase" of operating as a business under the new minimum wage.

One could argue that such price inflations are simply selfish acts of protest by these businesses against minimum wage regulations that increase their expenses. It probably often is the case- but whether it is a selfish or 'necessary for survival' move, either way prices do increase for us as consumers.

Franklin D. Roosevelt championed the minimum
wage in an economically struggling USA.

PRO: Economic Stimulation

The minimum wage could have positive effects for the national economy, firstly in the form of stimulating consumer spending. A study by the Chicago Federal Reserve Bank examined 23 years of household spending statistics, concluding that for every dollar the minimum wage increased, the average worker received an extra $2800 for consumer spending. The 2009 study noted that spending on cars in particular increased as a result of increasing the minimum wage.

President Franklin Roosevelt was a huge proponent of the minimum wage for this reason- he famously stated "the best customer of American Industry is the well-paid worker", during his push to enact the federal minimum wage in the USA in 1938, during a recession following the Great Depression.


The Minimum Wage- Help or Hindrance? Put your opinions in the comments below! 

What Is Corbynomics?

With the results of the UK Labour Party Leadership Elections set to be announced this Saturday, it's time to take a look at the economic policies of one of the candidates considered the frontrunner, and also the furthest to the left, by many- Jeremy Corbyn.

The Islington MP's economic proposals have made such an impact that they have come under the new title of 'Corbynomics'. Though, admittedly, adding 'nomics' to the names of his rivals would lack the front page appeal of this title (especially 'Burnhamnomics', or would it be 'Burnhamomics'?), it is undoubtedly the unique nature of Corbyn's policies in the leadership race that has brought them a name to come under.

So, what are Corbyn's policies, and are they credible? Here are 4 of his policies that are making the headlines.

An End to Austerity

"You just cannot cut your way to prosperity so Britain needs a publicly-led expansion and reconstruction of the economy, with a big rise in investment levels."

Corbyn is a strong opponent to David Cameron and
George Osborne's policy of austerity.

One of the most appealing policies to his supporters on the left, Jeremy Corbyn has pledged to bring an end to the money-saving spending cuts that have been enforced in recent years by the Conservatives.

This means that a government under Corbyn would end spending cuts on public services such as the NHS, the education system and transport- in fact, he would be likely to increase spending on these as demand increases due to a growing and ageing population.

Corbyn would also reverse one of the most controversial austerity tactics, that is the privatisation of public services. He has pledged to renationalise the railway system, and also prevent the further privatisation of the National Health Service.


Reducing Foreign Military Presence

Jeremy Corbyn believes Britain should learn lessons from
an intervention in Iraq seen by many to have failed.

"Thousands more deaths in Iraq ... will set off a spiral of conflict, of hate, of misery, of desperation that will fuel the wars, the conflict, the terrorism, the depression and the misery of future generations." (2003)

However, the only cut that Corbyn proposes is with regards to the military. He is a fervent anti-war activist, something highlighted by his strong criticism of past actions such as Tony Blair's move to invade Iraq, and current proposals like those to militarily become involved in Syria. So, a Britain under Jeremy Corbyn would reduce its military presence in areas like the Middle East, thus saving a considerable amount of money.

Furthermore, as a believer in non-proliferation of nuclear weapons, Corbyn would close down Britain's nuclear weaponry facility Trident, located in Scotland. This would not only save money, but also be a welcome move, considering a significant proportion of Scots are against the facilities themselves. However, some worry that such military contraction would endanger Britain, in what many see as an increasingly threatening world.


'Quantitative Easing for the People'

"QE for people instead of banks"

Banks would no longer benefit from government QE
programmes under Corbyn.

Quantitative Easing is nothing new in government policy, but the manner in which Jeremy Corbyn seeks to implement the divisive policy highlights the new direction in which he seeks to take Britain.

Put simply, in the current system of QE, the Bank of England creates new money that is inserted into the accounts of national banks, with the aim of encouraging these banks to lend more openly and thus stimulate spending in the economy.

Corbyn wishes for the Bank of England to continue creating new money, but proposes that the finances created should not go to the private banks, but a state-owned 'National Investment Bank', that will "head a multi-billion pound programme of infrastructure upgrades and support for high-tech and innovative industries".


National Education Service

Tuition fees have been a source of discontent for many
of Britain's young people. Under Corbyn they would not exist.

"To become a high skill, high pay, high productivity nation we need to invest in education throughout peoples' working lives - that is the path to prosperity for all." 

A significant part of Corbyn's anti-austerity programme would be the increasing of government spending on education. There has been much uproar in the past decade over university tuition fees, first introduced by Labour's own Tony Blair, and increased to as much as £9,000 a year under David Cameron.

Not only would Jeremy Corbyn abolish these tuition fees, but he has also proposed the reintroduction of university grants, which have just been replaced by loans.

Free university forms a major part of Corbyn's 'National Education Service' proposal. This system would see the government increase spending on education (funded by tax increases, government military spending cuts and the economic productivity boost the Corbyn camp believe their policies will bring), in order to make education accessible to all, providing universally free childcare right up to free university.

Should Footballers Be Paid So Much?

VIDEO: http://bit.ly/XHuBp8

It's debate that's been steaming up in recent years; mostly by the activity of clubs such as Real Madrid, who spent a record-breaking £85 million to purchase Welshman Gareth Bale, along with a rumoured £300,000 a week pay package. Should footballers be paid such huge amounts?

Huge investment in the last decade or so into the beautiful game has launched this debate- kickstarted here in England by Russian oligarch Roman Abramovich, whose 140 million pound takeover of Chelsea FC in 2003 sent shockwaves throughout world football- it was the first major introduction of big, big money into the sport.

According to the Professional Footballers' Association, in the 1950s an England player at the height of his game would have earned today's equivalent of £75,000 a year- a good wage by today's standards (in nominal terms, disregarding inflation and other changes)- that of a doctor or medium-scale manager perhaps.

Today, however, the story is very different. Money is being thrown about by the oligarchs, sheikhs and other billionaire owners of today's big clubs. Abramovich was rumoured to have lured Eden Hazard to Chelsea through a phone call, saying "I don't know what your wage is, but I'll triple it.".

This is simply an example of market activity- supply and demand. Numerous world class clubs other than Chelsea were after the young Belgian attacker- driving up his market price, to the point that he is being paid roughly £180,000. His sale was similar to that of an auction- Manchester United and Manchester City had been put in pole position to sign him, but the tables turned when Chelsea trumped their bids for him- paying £32million.

This attitude that skill and therefore success can be bought, and the strengthening of the impact of supply and demand this has caused in football have led to huge changes in the wages of footballers.

The average wage of Manchester City this year, the highest in the world, was £102,653. Not a year. Not a month. But per week. That's roughly £5.4 million.

Much has been made of such astronomical figures.

In a time of economic trouble and wage stagnation that has recently hit hard most of the population, footballers have been criticised for their huge multi-million salaries, 'all for kicking a ball around'. Middle and lower class wages have stagnated, whereas that of footballers has rocketed in the past decade.
While this certainly is an issue of justice, particularly in nations such as Spain where the employment rate has recently hit 26%, is a curbing of football wages the best way to correct this?

£2.3 million of income tax per Manchester City player (almost £60m altogether from the regular 25-man squad) will have entered the tax pot in the past year- and while this is not an earthshaking contribution (£105 billion was spent on the NHS in 2012/13), it is by no means useless- the tax from Manchester City players' wages alone is a fifth of the Somerset County Council's budget.

So footballers' salaries do actually have an effect on government public spending- though Manchester City alone may not have caused any particular bumps in the government spreadsheets, consider that there are 20 teams in England who pay wages of a similar (slightly lower) amount.
This is undoubtedly a positive contribution- these contributions of tax are certainly high enough in aggregate to maintain public spending in certain areas, in particular areas such as local government noted above.

We must remember one aspect of this debate- the money used to pay footballers is by no means coming without choice from the regular taxpayer. If you want to contribute to footballers' wages you buy a shirt, you buy a ticket to a game- but still, the majority of money for the wages comes from  the wealthy benefactor that is the owner- be is Roman Abramovich, or Sheikh Mansour, the owner of Manchester City.

Footballers' wages are therefore in fact a very effective way in which to funnel money from the wealthy billionaires of the world- it is unlikely that Abramovich, Mansour and the numerous foreign owners of clubs in the Premier League would invest so many millions in Britain if something the scale of the Premier League was not in place. Roman Abramovich has invested over £1 billion on his beloved Chelsea- much of which has been spent on footballers' wages- and certainly much of which has gone into the tax pot to contribute to public spending.


SOURCES:

PFA on past wages http://www.telegraph.co.uk/sport/football/competitions/premier-league/8265851/How-footballers-wages-have-changed-over-the-years-in-numbers.html

Manchester City wages http://www.dailymail.co.uk/sport/article-2604978/Manchester-City-global-sports-salary-list-ahead-New-York-Yankees-Los-Angeles-Dodgers-Chelsea-Arsenal-Liverpool-Manchester-United.html

Spanish unemployment rate http://www.tradingeconomics.com/spain/unemployment-rate

NHS Spending http://www.nhsconfed.org/resources/key-statistics-on-the-nhs

Somerset County Council Budget (£327.9m) can be found on their 2012/13 Statement of Accounts.

Roman Abramovich spending on Chelsea http://www.standard.co.uk/news/1-billion-cost-of-roman-abramovichs-chelsea-empire-6390456.html