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Throughout the UK election Jeremy Corbyn and Labour had in their manifesto to raise the minimum wage to £10 p/h:

The shadow chancellor told his party's conference in Liverpool that he would task a new body to set the wage at an appropriate level, which studies have suggested would be above £10.

The same policies were implicated by Bernie Sanders throughout the presidential election with him fighting for the $15 minimum wage. But, to keep things simple I'll stick to the UK for now.

The current national living wage is at £7.50 p/h for over 25s. Which if the £10 p/h increase was implemented, I would say is a significant increase in comparison to recent years:

  • 2016 - £7.20 p/h
  • 2015 - £6.70 p/h
  • 2014 - £6.50 p/h

What are the consequences of such an increase in minimum wage? Wouldn't it hit small businesses hard?

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    No body knows ahead of time, but consider this. Lowering the minimum wage to £0.1 an hour would result in unemployment level dropping to 0%. Rising the minimum wage to £100000 an hour would result in official unemployment reaching 100%. Now, you could plot a curve between those two points. Every increase would result in stepping towards 100% unemployment level. The thing is, around £7.50 an hour the line could be steep or flat. Rise in minimum wage could significantly increase unemployment level or not at all. Politician are just arguing about the shape of the curve.
    – user14816
    Jun 29, 2017 at 8:58
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    @Tlen This is a quite drastic oversimplification. There are lots of countries with no minimum wage which still have unemployment.
    – Philipp ♦
    Jun 29, 2017 at 9:09
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    @Philipp would you consider hiring a person to clean your apartment for £100,000 a month? No. £1,000? No. £100? Maybe. £1? yes. Lowering minimum wage would erase classical unemployment. If one chooses to drop out of the labor market and no longer seeks employment, he is not counted as unemployed. I recommend "Out of Work: Unemployment and Government in the Twentieth-Century America" by economists Richard Vedder and Lowell Gallawa.
    – user14816
    Jun 29, 2017 at 9:47
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    @Tlen Frictional unemployment will still exist. If I lose my job, I'm not going to just take another one flipping burgers, I'm going to live off of my emergency fund for up to 6 months and be unemployed until I find a position with the right compensation, work, and company culture.
    – lazarusL
    Jun 29, 2017 at 14:20
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    @user4012 designed by whom? If anyone were designing jobs for such a purpose, or perhaps more pertinently, a minimum wage level, they would make the minimum dependent on the employee's age (as it is in some jurisdictions, notably for the purpose of this question including the UK, but not in the majority of those with which I am familiar). So if you follow the link in the question you'll see that the £7.50 hourly wage is decidedly not designed for young people entering the job market.
    – phoog
    Jun 29, 2017 at 17:02

2 Answers 2

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Seattle increased the minimum wage from $9.47 to $11 an hour and then from $11 to $13 an hour. In the $9.47 to $11 an hour increase income outweighed employment losses to produce an average increase in earnings (about $24 a month). The $11 to $13 increase produced the opposite effect. It not only decreased average earnings ($125 a month), but it did so enough to wipe out the increase from $9.47 to $11.

How does this compare to the Labour proposal? £10 is roughly $13 and £7.50 is roughly $9.74 under the current exchange rate. If the United Kingdom is similar to Seattle (in the United States), the proposed increase would reduce average earnings because hours would drop more than hourly wages would increase.

It's worth noting that Seattle is in a relatively high wage area of the US. While there are a couple other cities that might do better, like New York City and San Francisco, many regions would not. For example, $15 is higher than the median wage in most of the South. That said, the UK is a different country, and wages are more likely to be comparable to Seattle there than in the rural South US.

Note that even the $9.47 to $11 increase caused hours to drop. It just caused the hourly wage to increase enough to offset that on average. That's fine for those whose pay goes up. It's kind of hard on those whose hours are cut or worse, eliminated. This is important, because people who lose their jobs entirely can't get better jobs. They have to sit around and wait for an opening in the same lousy jobs from which they were laid off.

The problem is of course that the first people laid off tend to be those with the least experience. I.e. the ones who have the most trouble finding new jobs. The UK's separate rules for those under 25 may help with that, but in the US, the places with the highest minimum wage also tend to have the highest youth unemployment.

It's noteworthy that Denmark has high wages, a robust safety net, and no statutory minimum wage. Its "minimum wage" is set on an industry by industry basis through agreements between employers and unions. Sweden, Norway, and Finland operate similarly.

And these are the short term effects. Longer term it's possible that labor might be replaced with automation, even at the $11 level. And of course, the money has to come from somewhere. Short term that might be ownership. Longer term, it is likely to come in the form of higher prices. As a general rule, owners have more investment options than consumers have purchase options.

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  • It needs to be noted that two respected research results came out this past week about Seattle...and they had conflicting results: nytimes.com/2017/06/26/business/economy/… (TL/DR: it's complicated and there is still conflicting data)
    – user1530
    Jun 29, 2017 at 17:37
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    Never understood why this is a complicated question. No matter who is working, if that person's production stays the same, that means the value of what they produce stays the same. Minimum wage simply assigns an arbitrary value to the base production. And further, values any production below the arbitrary "floor" the same. In the end if you raise wages from 7 to 8 then new(8) = old(7)
    – Frank Cedeno
    Jun 30, 2017 at 12:19
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    It would also be worth noting the closing down of businesses that can not longer function because of the hours decrease you've mentioned. facesof15.com has a map of all businesses(usually small) that have either been affected or shut down because of the sudden increase in wages.
    – discodane
    Jun 30, 2017 at 17:59
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Minimum wage is already pricing labour costs well above what supply/demand would have set it at, a further increase will just see automated solutions become more appealing to employers than they already are.

We are already seeing self service checkouts in supermarkets, self-service order/payment points in fast food restaurants.

Basically a lot of the low skilled jobs that would be effected by minimum wage laws can be easily automated so i would expect to see more investment in these technologies.

if you increase the price of something you will lower the demand for it. Labour is no different.

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  • In theory, this is correct. In practice, take a look at how &**&^*y automated self service checkouts are (that may change in near future; but it's nowhere near production ready now). Given current mininum wage levels, cashiers are still cheaper than automated checkouts that produce equal customer satisfaction/speed.
    – user4012
    Jun 29, 2017 at 16:54
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    @user4012 higher labor costs will drive investment into these technologies.
    – user1450877
    Jun 29, 2017 at 17:13
  • This isn't necessarily incorrect, but hardly comprehensive. This is a simplification of but one aspect of the issue.
    – user1530
    Jun 29, 2017 at 17:35
  • @user1450877 - again, theoretically, yes. Practically, we invested in fusion energy for decades with zero results. AI only became somewhat usable very recently despite decades if investment and research. You can't assume the cost of developing a specific technology is always less than the cost of labor - it depends on specific situation
    – user4012
    Jun 29, 2017 at 19:46

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