This question was asked recently on a patriotic forum, and I promised to answer it. So here goes.
There are many factors which influence how much money a
given company pays in wages to its staff, and the minimum wage law is just one
of them. Other factors include the
skills required of the employees, the cost of owning or renting a home in the
vicinity of the workplace, and of course how much turnover the company actually
has.
Consider a company which pays each member of its staff at
least five percent more than the minimum wage.
If the minimum wage is then increased by exactly five percent, then the
company will have no need to increase any of its salaries as they will already
be complying with the law.
By contrast, consider the unlikely case of a company which
pays each member of its staff exactly the minimum wage and no more. If the minimum wage is increased by five
percent, then the company will have to increase its entire payroll by that
percentage. Nevertheless that would not
increase its costs overall by five percent, unless of course the entire costs
of the company were made up of its payroll and nothing else.
For example, a company whose payroll makes up forty percent
of its total costs would need to increase its costs by no more than two percent
(five percent of forty percent) in order to meet a five percent increase in the
minimum wage.
Then again, it is perhaps fair to say that every cost is a
labour cost. Most companies will have a
stationery bill for example. If the
minimum wage increases, then companies which supply stationery may have to increase
their prices as a result, thereby pushing up costs for their customers. Almost everything a company spends money on
represents somebody’s labour somewhere along the line. Can anyone think of any exceptions to this?
The only exception I can think of is that a lot of the goods
purchased by British companies are produced abroad, and therefore are not
affected by this country’s minimum wage law.
Another factor is the pay differential. This is the difference between the wages of
two or more people. Suppose the office
junior in a given company is paid £6.31 – the current minimum wage – and a
clerk is paid £6.81. The differential is
fifty pence. If the minimum wage law pushes up the office
junior’s salary to £6.61, then the clerk will then have a pay differential of
just twenty pence, unless of course the clerk’s salary is also increased.
The United Kingdom has had a minimum wage since 1999. The Labour Party promised a minimum wage at
the 1992 general election, but it remained in opposition. I think I am quoting Lord Archer here. In the run-up to the 1992 general election,
Labour’s shadow chancellor John Smith told a businessman that he did not have
to worry about the proposed minimum wage because the trade unions had said that
they would not seek to push up differentials.
The businessman replied that he needed differentials to run his
business, but did he?
Differentials exist for a reason, but it is easy to
exaggerate the benefits of paying one person more than another.
Suppose two companies are in the same
business, and both pay similar wages to their staff. Both are forced by an increase in the minimum
wage to pay more money to at least some of their staff. One company also adjusts the wages of all of
its employees to ensure that differentials remain the same, while the other
company allows its differentials to decrease.
The result is that the second company now has a lower payroll relative
to the first company, and therefore can perhaps charge lower prices than the
first company, thereby allowing it to win customers away from the first
company.
Employees of the second company
may grumble about the reduction in their differentials, but at least their jobs
are secure. By contrast, employees of
the first company still enjoy their differentials, but their jobs are perhaps
less secure.
The costs of a company can be neatly categorised as taxation,
payroll, and other costs. The company’s
profits represent its turnover less costs.
An increase in the minimum wage will probably increase the cost
of the payroll, and may also increase some of the other costs. Assuming that the tax bill remains the same,
then the company will have to choose to accommodate its increased costs either by
increasing its prices or else by reducing its profits.
One of the arguments that is sometimes offered in defence of
the minimum wage is that it cuts the cost to the government of tax credits or
other in-work benefits. If this is true,
and there is probably some truth in it, then an increase in the minimum wage could
result in the government lowering taxes on the basis that it requires less
money. In this case, companies which see
their payroll and other costs increase when the minimum wage increases might at
some point see their tax bills fall.
In conclusion, it is not inevitable that an increase in the
minimum wage will result in an increase in the prices of the goods we buy. Also, if an increase in the minimum wage
results in an increase in prices, then the increase might not be as much as we
might expect. Economics is a complex
subject, and any generalisations we might choose to make could easily prove to
be inaccurate.
This post follows on from an earlier post:
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