The Minimum Wage Debate: Are Good Intentions Enough?

The Minimum Wage Debate: Are Good Intentions Enough?

Have you ever scrolled through your social media and seen someone celebrating a minimum wage increase with the caption "finally, some good news!" only to then see someone else commenting "this will kill small businesses"? Welcome to one of economics' most heated debates!

Today, we're going to play devil's advocate and look at some challenging perspectives on minimum wage laws. Even if you personally support higher minimum wages (and many people do for good reasons), understanding the counterarguments will make you a more well-rounded economics student. After all, the IB examiners love nothing more than a balanced evaluation that considers multiple perspectives!

The Popular Narrative vs. Economic Complexity

When the UK government announced the latest National Living Wage increase to £11.44 per hour, most news headlines were positive. More money for workers sounds brilliant, right? But economics is notorious for finding hidden costs and unintended consequences that don't make it into the Instagram captions.

Let's dig into some common claims about minimum wages and see what the economic research actually says...

"Raising the minimum wage reduces poverty" - But does it really?

Picture this: Zayn works at a local corner shop for minimum wage. When the National Living Wage increases, his hourly pay jumps from £10.42 to £11.44. That's nearly £40 extra per week for a full-time worker - enough for a decent Nando's with mates or to cover your Spotify, Netflix, and Amazon Prime subscriptions with change to spare.

But here's where it gets a bot more complicated:

1. Many minimum wage workers aren't actually in poverty. Think of sixth formers working weekend shifts at Primark while living with their middle-class parents. A 2023 UK study found that less than 20% of minimum wage increases go to households in the bottom income quintile.

2. Many people in poverty don't work at all. If you're unemployed, disabled, or a full-time carer, minimum wage increases don't directly help you.

3. Some jobs might disappear altogether. Mohammed, who owns that corner shop, might decide he can't afford to keep Zayn's position at the higher wage and either cut hours or handle more of the work himself.

The UK's Universal Credit and tax credit systems might actually be more effective at targeting help to those who need it most. These benefits are means-tested (based on your income and circumstances) rather than simply boosting wages for everyone regardless of their situation.

"Minimum wage increases boost the economy through increased spending"

This argument seems logical on the surface. When workers get paid more, they spend more, creating a virtuous cycle of economic growth, right?

Let's break it down with a UK example:

Imagine a Greggs in Manchester where five workers receive a £1 per hour raise due to a minimum wage increase. That's about £900 more per month in total wages (assuming they each work about 35-40 hours weekly).

That extra £900 might be spent on:

• A few more pints at Wetherspoons

• New trainers from JD Sports

• Tickets to see Manchester United (well, maybe just the cheaper seats!)

But where does that £900 come from? Greggs has several options:

1. Raise prices – Those sausage rolls and steak bakes might cost more, reducing what customers can spend elsewhere

2. Cut hours or staff – Maybe they decide to close an hour earlier each day

3. Reduce profits – Leading to less investment or lower returns for pension funds that own Greggs shares

4. Accelerate automation – Perhaps investing in self-service kiosks sooner than planned

Economics teaches us that there's no free lunch. The minimum wage doesn't create new wealth; it redistributes existing wealth. Sometimes this redistribution is positive, but it's not the simple economic boost that many claim.

"Businesses can easily absorb higher wages by reducing profits"

This might be true for massive companies like Tesco or HSBC, but what about your local chippy or the independent bookshop in your town centre?

UK small businesses typically operate on profit margins of just 8-10%. When the minimum wage increases by 9.8% (as it did in April 2024), that can easily wipe out most or all of a small business's profit.

Research from the Federation of Small Businesses found that after recent minimum wage increases:

• 71% of affected small businesses raised prices

• 64% reduced staff hours

• 43% cancelled or scaled back investments

• 31% replaced workers with technology where possible

Think about your high street. How many empty shopfronts have appeared in recent years? While minimum wage increases aren't the only factor, they add another pressure to already struggling small businesses.

"Raising the minimum wage reduces reliance on government benefits"

This seems logical - higher wages should mean fewer people needing Universal Credit or Housing Benefit, right? The reality is more complicated, especially in the UK context.

The UK's Universal Credit system gradually reduces benefits as income rises. For every £1 extra you earn, you lose 55p in Universal Credit (after your work allowance). This means a minimum wage worker only keeps 45p of each additional £1 earned.

Plus, if some workers lose hours or jobs due to higher minimum wages, they might actually need MORE government support, not less.

A 2022 report from the Institute for Fiscal Studies found that minimum wage increases in the UK created modest savings in the benefits system, but these were partially offset by increased claims from those who saw reduced hours or lost employment.

"Other countries have high minimum wages without major job losses"

Looking at places like Denmark and Sweden that have high de facto minimum wages (through collective bargaining rather than legislation), some argue that the UK could simply follow suit without negative consequences.

But these comparisons miss crucial differences:

1. Denmark has more flexible hiring and firing rules

2. Sweden has exceptionally strong vocational training systems

3. Both countries have higher productivity than the UK

It's a bit like saying "Lewis Hamilton drives really fast without crashing, so I should be able to do that as well" - while ignoring his years of training, superior car, and professional support team!

The UK's productivity growth has been sluggish for years. Without addressing this underlying issue, high minimum wages put more pressure on businesses that aren't seeing corresponding productivity gains.

"The minimum wage stops greedy employers from exploiting workers"

This argument assumes that without minimum wage laws, employers would pay workers significantly less than they're worth. But in competitive markets, businesses have to compete for workers.

Even before the recent minimum wage increases, many UK employers were paying above minimum wage to attract staff. During the post-COVID "great resignation," pub chains like Wetherspoons and restaurants like Nando's raised wages well above the legal minimum to compete for workers.

The real issue isn't usually "greedy" employers, but rather:

1. Some jobs simply don't generate enough economic value to support high wages

2. Some workers (particularly those with few qualifications or little experience) struggle to find jobs that match their current productivity level

Recent Research: Who Really Gets Hurt?

Recent studies suggest that minimum wage increases have the most negative effects on:

1. Young workers – A comprehensive analysis found that minimum wage increases tend to reduce employment opportunities particularly for teens and young adults. When McDonald's has to pay more, they might prefer hiring a university graduate over a school leaver with no work experience.

2. Less-educated workers – Those with fewer qualifications are most vulnerable to job losses when wages rise. The most recent ONS data shows that unemployment rates for those with no qualifications are already about three times higher than for those with degrees.

3. Minorities – Some research suggests that minimum wage increases can disproportionately impact racial minorities, particularly those with lower education levels. In the UK context, this could affect certain communities that already face employment challenges.

4. Training opportunities – Studies indicate that when minimum wages rise, employers cut back on providing on-the-job training. Why? Because higher wage costs mean less money available for training, and employers expect workers to be more productive immediately to justify the higher wages.

A Balanced Perspective: Not All Bad, Not All Good

Before you conclude I'm completely against minimum wages, let me clarify: minimum wages can be beneficial in some contexts and harmful in others. The devil is in the details - how high they're set, how quickly they increase, and what other policies are in place to support workers and businesses.

The UK's approach of having an independent Low Pay Commission recommend minimum wage levels based on economic evidence has generally been more cautious and effective than politically-driven increases such as for instance, the politically-driven minimum salary increase in 2025 in Spain. This has likely helped minimise negative effects.

What Are the Alternatives?

If helping low-income workers is the goal, economists point to several alternatives that might be more effective than minimum wages:

1. Strengthen the UK's tax credit system - Providing more generous work allowances in Universal Credit could boost incomes without raising employer costs

2. Invest in skills and education - Helping workers become more productive through better training and education leads to naturally higher wages

3. Address high living costs - Tackling the UK's housing crisis would do more for many low-income families than modest wage increases

4. Support small businesses - Lower business rates and simplified regulations could help small employers afford higher wages

The Big Questions for IB Economics Students

When analysing minimum wage policies for your exams, consider these critical questions:

1. Who benefits and who loses from minimum wage increases? (Distribution effects)

2. What are the short-term versus long-term impacts? (Time horizons)

3. How do different market structures affect the outcomes? (Perfect competition vs. monopsony)

4. What alternative policies might achieve similar goals with fewer drawbacks? (Policy evaluation)

5. How do empirical studies compare with theoretical predictions? (Evidence-based analysis)

Remember that in economics, good intentions don't always lead to good outcomes. Policies need to be judged not just at the beginning by what they aim to achieve, but by what they actually accomplish - including unintended consequences.

Next time you see a headline celebrating or condemning minimum wage increases, you'll have the economic toolkit to look beyond the slogans and form your own nuanced view. And that's what getting a 7 in IB Economics is all about!

What do you think? Is the minimum wage a helpful policy or does it do more harm than good?

Stay well