Talk is that the government is considering decreasing, or, at the very least, holding the minimum wage where it is. Superficial analysis may suggest such a strategy is right, but look a little deeper and it may be very dangerous.

Unemployment is not the UK’s main problem at the moment. It is too high yes, but considering how lacklustre the overall performance of the economy has been, employment has been surprisingly good. No, the real problem is that at a time when corporate profits to GDP are hitting new records, real wages are falling. If there was a way to increase the average wage, demand across the economy would rise, and maybe the UK would pull out of its downturn.

Critics of such an idea say that obviously if the minimum wage rose, employers would take on fewer staff. They say it’s simple economic theory. But economic theory says no such thing. Rather economic theory says that a rise in the minimum wage may lead to a rise in unemployment, but whether this is true or not depends on the shape of the curve describing what economists call the marginal physical productivity of labour.

Is it not possible that right now employers take on the staff they need to meet customer demand. Sure if they paid staff more, profits would fall. But as this article shows, see US corporate profits to GDP at all-time high, this may not be a bad thing.

If, however, companies were forced to pay staff more, aggregate demand across the economy would rise, and companies may suddenly find they make even more profits.
The real point here is that different times call for different measures. Or, to put it another way, when we learn from history make sure we learn the right lesson. There are occasions when a rise in the minimum wage would have a catastrophic effect on unemployment. But at a time when US corporate profits to GDP are at an all-time high; at a time when UK companies sit on a massive cash pile; at a time when real wages have been falling for over two years, it is surely the case that right now is not such an occasion.

Besides as this piece suggests if you sign-up to the view that the UK has too many zombie companies, maybe a rise in the minimum wage would solve that problem. See: Will a rise in the minimum wage put an end to zombie companies?

© Investment & Business News 2013