The minimum wage has long been controversial. This week, workers in the UK will be the latest to join the debate.
From 1 October, all four tiers of the UK's minimum wage are set to rise. When they do, low-wage workers will see pay hikes of between £0.08 and £0.57 per hour--part of a larger plan to implement a national living wage of £9 per hour by 2020.
The minimum wage is intended to boost pay for the lowest-skilled workers, and studies show it usually accomplishes that goal. However, economists also teach that minimum wages can have harmful side effects.
For example, the Office for Budget Responsibility estimates that increasing the national living wage could lead to 60,000 job losses and lower GDP by 0.1 percent by 2020. And an analysis from credit ratings agency Moody's warns a £9 minimum wage would have a material impact on retailers, likely ushering in price rises and fewer low-skilled jobs.
Lessons from History
In practice, most real-world studies find few harmful effects of minimum wages. However, surveys show economists disagree about the impact of minimum wage on the economy. Partly, this is because most minimum wage changes studied by economists have been small, making it hard to find an impact in the jobs numbers.
One way to measure the size of the impact of a minimum wage is to compare it to the median wage for all workers in the economy. The highest minimum wages relative to median wages for all OECD countries (Organisation for Economic Co-Operation and Development) are found in Turkey, Chile and France, while the lowest are in the Czech Republic, Mexico and the U.S.
Getting the Right Wage
In general, the higher the minimum wage compared to median wages, the bigger the economic effects of the law--both in terms of positive effects on workers' pay packets and negative effects on employment and the broader economy.
Most studies find that low minimum wages kept below 50 percent of the median wage are harmless and mostly benefit workers. Although even at these low levels, some studies have found negative effects on jobs for low-skilled workers as companies have automated workplaces and shifted jobs to low-cost areas in response.
By 2020, the UK's £9 minimum wage is expected to breach the 50-percent-of-wages threshold and is expected to reach 60 percent of the median UK wage. At that level, labour economists and our team at Glassdoor will be watching closely for signs of unintended effects in the coming years.