Minimum wage is increased

The government has today announced plans to increase the national minimum wage (NMW) by 3.8%, from £5.52 to £5.73 per hour. This rise will come into force in October.

18 to 21 year olds will also see an increase in their minimum wage from £4.60 to £4.77, and 16 to 17 year olds from £3.40 to £3.52.

The minimum wage has been a flagship policy of New Labour and just over 1 million workers benefit.

Business Secretary John Hutton said: “The national minimum wage remains one of the most important rights introduced by the Government in the last decade.

“Before it was introduced, some workers could expect to be paid as little as 35 pence an hour. Our legislation has ensured that can no longer happen.

“I am proud of the minimum wage. It makes a real difference to the lives of many of our lowest-paid workers and protects them from exploitation. It also creates a level playing field for business and boosts the economy.”

The 3.8% rise is interesting in the context of much lower pay increases in the public sector - for example police officers. Thus a higher-than-average-earnings increase in NMW can be seen as potentially redistributive.

When the minimum wage was introduced in 1998 some economists predicted a rise in involuntary unemployment in low paid jobs. A useful question for students of labour market economics is why the policy did not have this effect. (It would be useful to consider both demand and supply factors in the market for workers).

Rather surprisingly, almost 300,00 workers were paid less than the minimum wage in spring 2007 according to the ONS. This may not all be due to non-compliance on the part of employers; some workers are not eligible for the minimum level of pay. This includes apprentices, self-employed workers and those without formal contracts.

Perhaps this is where the low paid work has gone?

(Obviously illegal workers may not be paid minimum wage, but it is also unlikely they appear in labour market statistics).