Conservative Party leaders are considering the benefits of an above-inflation rise in the minimum wage. This policy has been advocated by both the Labour Party and the Liberal Democrats as a means of helping the lowest paid workers. From 2008 to 2013, minimum wage rates fell 5.2% in real terms: in other words, nominal increases were less than the increase in both the RPI and CPI (see UK minimum wage: a history in numbers).
Advocates of a real rise in the minimum wage argue that not only would it help low-paid workers, many of whom are in severe financial difficulties, but it would benefit the Treasury. According to Policy Exchange, a free-market think tank closely aligned to the Conservative Party, increasing the minimum wage by 50p would save the Government an estimated £750m a year through higher tax revenues and lower benefit payments.
But even such a rise to £6.81 would still leave the minimum wage substantially below the living wage of £8.80 in London and £7.65 in the rest of the UK, as estimated by the Living Wage Foundation (see The cost of a living wage). Although many businesses are now paying at least the living wage, many others, especially small businesses, argue that a rise in the minimum wage above the rate of inflation would force them to consider cutting the number of employees or reducing hours for part-time workers.
Meanwhile, in the USA 13 states have raised their minimum wage rates from the 1st January 2014 (see). Some of the rises, however, were tiny: as little as 15 cents. In a couple of cases, the rise is $1. Currently 21 states and DC have minimum wage rates above the Federal level of $7.25 (approx. £4.40); 
20 states have rates the same as the Federal level; 4 states have rates below the Federal level. At $9.32 per hour, Washington State has the highest state minimum wage; the lowest rates ($5.15) are in Georgia and Wyoming. In 5 states there is no minimum wage at all. As the ABC article below states:
The piecemeal increases at the local level are occurring amidst a national debate over low wages and income inequality. Fast food and retail workers have been staging protests and walking off work for more than a year, calling for better pay and more hours. Currently, fast food workers nationally earn an average of about $9 per hour.
Workers from McDonald’s, Wendy’s, Burger King and other fast food joints are calling for $15 per hour. Wal-Mart workers organizing as part of the union-backed OUR Walmart aren’t asking for a specific dollar amount increase, but they say it’s impossible to live on the wages they currently receive.
President Obama has been throwing his weight behind the issue. Earlier this month, the President said in a speech that it’s “well past the time to raise the minimum wage that in real terms right now is below where it was when Harry Truman was in office.” But such legislation has a bleaker outlook if it reaches the Republican-led House of Representatives. House Speaker John Boehner has said that raising the minimum wage leads to a pullback in hiring.
So what are the costs and benefits of a significant real rise is the minimum wage on either side of the Atlantic? The articles explore the issues.
Articles: UK
Lib Dems accuse Tories of ‘stealing’ their policy as George Osborne prepares to approve above-inflation rise in minimum wage Independent, Andrew Grice (7/1/14)
Lib Dems accuse Tories of ‘nicking’ party’s policy on low wages The Guardian, Nicholas Watt (7/1/14)
Cut housing benefit? A higher minimum wage would help The Guardian, Patrick Collinson (6/1/14)
Miliband prepares to wage war The Scotsman, Andrew Whitaker (8/1/14)
Increasing the minimum wage is only a half answer to poverty New Statesman, Helen Barnard (8/1/14)
Raise the bar: Economically and socially, Britain needs higher wages Independent (7/1/14)
Another Tory says there’s a ‘strong case’ for raising the minimum wage The Spectator, Isabel Hardman (8/1/14)
Fairness and the minimum wage Financial Times (7/1/14)
Osborne wants above-inflation minimum wage rise BBC News (16/1/14)
George Osborne backs minimum wage rise to £7 an hour The Guardian, Nicholas Watt, (16/1/14)
Minimum wage: in his efforts to defeat Labour, Osborne risks mimicking them The Telegraph, Benedict Brogan (16/1/14)
Minimum wage announcement is not just good economics The Guardian, Larry Elliott (16/1/14)
Articles: USA
13 states raising pay for minimum-wage workers USA Today, Paul Davidson (30/12/13)
Minimum wage increase: Wage to rise in 13 states on Jan. 1 ABC15 (30/12/13)
NJ minimum wage sees $1 bump on Jan. 1 Bloomberg Businessweek, Angela Delli Santi (31/12/13)
Minimum wage hike a job killer ctpost, Rick Torres (7/1/14)
A Business Owners Case For Raising The Minimum Wage Grundy Country Herald, David Bolotsky (7/1/14)
Raising the Minimum Wage Isn’t Just Good Politics. It’s Good Economics, Too. New Republic, Noam Scheiber (31/12/13)
Minimum wage rises across 13 US states Financial Times, James Politi (1/1/14)
Information
National Minimum Wage rates GOV.UK
UK minimum wage: a history in numbers Guardian Datablog
List of minimum wages by country Wikipedia
Questions
- Draw two diagrams to demonstrate the direct microeconomic effect of a rise in the minimum wage for two employers, both currently paying the minimum wage, where the first is operating in an otherwise competitive labour market and the other is a monopsonist.
- What is meant by the term ‘efficiency wage rate’? How is the concept relevant to the debate about the effects of raising the minimum wage rate?
- What are the likely macroeconomic effects of raising the minimum wage rate?
- What is the likely impact of raising the minimum wage rate on public finances?
- Is raising the minimum wage rate the best means of tackling poverty? Explain your answer.
Interest rates in the UK have been at 0.5% since mid-2009, when they were reduced with the objective of stimulating the economy, through encouraging consumption and investment. Over the past 12 months, economic recovery has begun and with the housing market rising by 8.4% over the past year, what can we expect from interest rates?
Interest rates are a powerful tool of monetary policy and affect many of the components of aggregate demand. As such, they are also a key tool in achieving low and stable inflation rates and keeping unemployment low. Unemployment has been falling, as the economic recovery has taken hold, but is still above the 7% level that the Bank of England has said is needed before rates are increased. However, with the improvements in the housing market,
some are now expecting interest rates to go up sooner than previously thought. (Click here for a PowerPoint of the chart.)
28 economists were questioned about the future of interest rates in the UK and 93% of those asked were of the opinion that interest rates will still be at 0.5% by the end of 2014. Furthermore, more than 50% think that interest rates will not begin to go up until the second half of 2015 and 15% suggest that they will not increase until 2016.
What happens to interest rates will depend on many things, including changes in productivity, unemployment trends, wage growth and inflation. It is also likely to depend on economic changes in countries around the world. The following articles consider the future of interest rates.
UK interest rates to stay at 0.5% in 2014 – economists BBC News (3/1/14)
It is high time we raised interest rates and returned to normality The Telegraph, Jeremy Warner (2/1/14)
BoE will ‘move goalposts’ on interest rates Financial Times, Chris Giles and Claire Jones (1/1/14)
Interest rate rise with no wage increase ‘will push heavily-indebted to edge’ The Guardian, Heather Stewart (2/12/14)
BoE may lower jobless rate guidance, but not this month – Reuters poll Reuters, Suzanne Plunkett (3/1/14)
Questions
- Explain how each component of aggregate demand will be affected by changes in interest rates.
- How do interest rates affect unemployment?
- Interest rates are used to keep inflation on target. Explain how this is done.
- What might be the effect on the macroeconomic objectives if interest rates are increased?
- What are the arguments (a) for increasing Bank rate and (b) for maintaining it at the current 0.5% level?
Nearly two years ago, France lost its triple A credit-rating and the news has only got worse. Unemployment has risen and economic growth in France has remained low and this is one of the reasons why France’s credit rating has been downgraded further from AA+ to AA. A high credit rating doesn’t guarantee market confidence, but it does help to keep the cost of borrowing for the government low. Thus, this downgrading could spell trouble for French borrowing costs.
Standard and Poor’s (S&P), who downgraded the French credit rating, is expecting government debt to rise to 86% of gross domestic product and believes that unemployment will remain above 10% until 2016. While the French government has put various reforms in place to boost the struggling economy, S&P don’t believe they are sufficient and have been very public in criticising the government’s effort. They were quoted as saying:
We believe the French government’s reforms to taxation, as well as to product, services and labour markets, will not substantially raise France’s medium-term growth prospects and that on-going high unemployment is weakening support for further significant fiscal and structural policy measures.
Following the downgrading, the return for those investors purchasing French debt did begin to rise, echoing the theory that the cost of borrowing would rise. 
The yield on French government 10-year bonds increased from 2.158% to 2.389%. The outlook given to France by S&P was ‘stable’, implying that there is a relatively low chance that S&P would change France’s credit-rating again in the next two years.
Many were surprised at the downgrading of France’s credit rating, but this may be the nudge that President Hollande needs to push through extensive labour market reforms with the aim of reducing unemployment and generating growth in the economy. Despite this latest move by S&P, the other credit rating agencies have yet to take similar action. Perhaps they are more convinced by the Finance Minister, Pierre Moscovici who claims that France’s debt is ‘one of the safest and most liquid in the world.’ He commented that:
They are underestimating France’s ability to reform, to pull itself up … During the last 18 months the government has implemented major reforms aimed at improving the French economic situation, restoring its public finances and its competitiveness.
It will take some time for the full impact of this development in France’s economy to become apparent. The cost of borrowing has already risen only time will tell what will happen to market confidence over the coming weeks. However, what is certain is that pressure is already mounting on Francois Hollande. The following articles consider the French economy.
France told to reform labour market after second credit rating downgrade The Guardian, Phillip Inman (8/13/13)
France’s credit rating cut by S&P to AA BBC News (8/11/13)
S&P lowers France rating on reform doubts, markets unfazed Reuters, Nicholas Vinocur (8/11/13)
Hollande approval rating slumps as France downgraded The Telegraph, James Titcomb (8/11/13)
S&P cuts France’s credit rating by one notch to double-A Wall Street Journal, William Horobin (8/11/13)
Five charts that show the state of the French economy The Telegraph (8/11/13)
France rating downgrade heaps pressure on Francois Hollande Financial Times, Michael Stothard (8/11/13)
Questions
- What does a double A rating mean for the French economy?
- Which factors will be considered when a ratings agency decides to change a country’s credit rating?
- France’s unemployment rate is one of the key factors that S&P has considered. Why is France’s unemployment rate so high? Which type(s) of unemployment are increasing?
- Use a diagram to illustrate the unemployment that France is facing.
- If a country does see its credit rating downgraded, what might this mean for government borrowing costs? Explain why this might cause further problems for a country?
- Markets have been ‘unfazed’ by the downgrade. How do you think markets will react to over the coming weeks? Explain your answer.
- What action could the French government take to ensure that S&P is the only ratings agency that downgrades their credit rating?
First the good news. Employment is rising and unemployment is falling. Both claimant count rates and Labour Force Survey rates are down. Compared with a year ago, employment is up 279,092 to 29,869,489; LFS unemployment is down from 7.87% to 7.69%; and the claimant count rate is down from 4.7% to 4.0%.
Now the bad news. Even though more people are in employment, real wages have fallen. In other words, nominal wages have risen less fast than prices. Since 2009, real wages have fallen by 7.6% and
have continued to fall throughout this period. The first chart illustrates this. It shows average weekly wage rates in 2005 prices. (Click here for a PowerPoint of the chart.)
The fall in real wages is an average for the whole country. Many people, especially those on low incomes, have seen their real wages fall much faster than the average. For many there is a real ‘cost of living’ crisis.
But why have real wages fallen despite the rise in employment? The answer is that output per hour worked has declined. This is illustrated in the second chart, which compares UK output per worker with that of other G7 countries. UK productivity has fallen both absolutely and relative to other G7 countries, most of which have had higher rates of investment.
The falling productivity in the UK requires more people to be employed to produce the same level of output. Part of what seems to be happening is that many employers have been prepared to keep workers on in return for lower real wages, even if demand from their customers is falling. And many workers have been prepared to accept real wage cuts in return for keeping their jobs.
Another part of the explanation is that the jobs that have been created have been largely in low-skilled, low-wage sectors of the economy, such as retailing and other parts of the service sector.
But falling productivity is only part of the reason for falling real wages. The other part is rising prices. A number of factors have contributed to this. These include a depreciation of the exchange rate back in 2008, the effects of which took some time to filter through into higher prices in the shops; a large rise in various commodity prices; and a rise in VAT and various other administered prices.
So what is the answer to falling real wages? The articles below consider the problem and some of the possible policy alternatives.
Articles
Inflation, unemployment and UK ‘misery’ BBC News, Linda Yueh (16/10/13)
Employment is growing, but so are the wage slaves The Guardian, Larry Elliott (16/10/13)
Living standards – going down and, er, up BBC News, Nick Robinson (26/7/13)
Revealed: The cost of living is rising faster in the UK than anywhere in Europe, with soaring food and energy bills blamed Mail Online, Matt Chorley (16/10/13)
Cutting prices to raise living standards is just a waste of energy The Telegraph, Roger Bootle (6/10/13)
Downturn sees average real wages collapse to a record low Independent, Ben Chu (17/10/13)
Why living standards and public finances matter Financial Times, Gavin Kelly (29/9/13)
Social Mobility Tsar Alan Milburn Calls on Government to Boost Wages to End UK Child Poverty International Business Times, Ian Silvera (17/10/13)
Do incorrect employment growth figures explain low UK productivity? The Guardian, Katie Allen (23/10/13)
Data
Unemployment data ONS
Average Weekly Earnings dataset ONS
Consumer Prices Index ONS
International Comparison of Productivity ONS
Questions
- How are real wages measured?
- Why have real wage rates fallen in the UK since 2009?
- What factors should be included when measuring living standards?
- Why has employment risen and unemployment fallen over the past two years?
- What factors could lead to a rise in real wages in the future?
- What government policies could be adopted to raise real wages?
- Assess these policies in terms of their likely short-term success and long-term sustainability.
Investment is essential for the growth of any economy, but none more so for an economy recovering from a severe downturn, such as the UK. Not only will it bring in much needed money and then create jobs for UK residents, but it will also continue to build ties between the UK and the world’s fastest growing economy.
George Osborne has been in China promoting business opportunities for investment in the UK and one such investment is into Manchester Airport. The ‘Airport City’ Project will be a combined effort, or a Joint Venture, between the Greater Manchester Pension Fund, the UK’s Carillion Plc and Beijing Construction Engineering Group. The plan is to create offices, hotels, warehouses and manufacturing firms, bringing in thousands of jobs in the process, thus providing a much needed boost to the British economy. Britain is already one of the top nations attracting Chinese investment, with more than double the amount of any other European nation. George Osborne is clearly in favour of further improving business ties with China, saying:
I think it shows that our economic plan of doing more business with China and also making sure more economic activity in Britain happens outside the City of London is working…That’s good for Britain and good for British people.
However, the benefit of such investment from China into the UK, is not just of benefit to our domestic economy. China will also reap benefits from its involvement in projects, such as the development of Manchester’s airport. The Managing Director of BCEG, Mr Xing Yan, said:
To be included in such an interesting and unique development is a real honour…We see our involvement in Airport City as an extension of the memorandum of understanding between China and the UK, where we have been looking to further explore joint infrastructure opportunities for some time.
The airport investment by China is only one of many of its recent forays into the UK economy. Other investments include plans to rebuild London’s Crystal Palace and plans to create a third financial district near London’s City Airport.
Some may see more Chinese involvement in UK business as a threat, but for most it is viewed as an opportunity. An opportunity that both Boris Johnson and George Osborne will undoubtedly exploit as far as possible, with the hope that it will generate income, employment and growth. The following articles consider this investment opportunity.
Manchester Airport Group announces jobs boost The Telegraph, David Millward (13/10/13)
China’s BCEG joins UK Manchester airport joint venture Reuters (13/10/13)
Manchester Airport to receive investment from China BBC News (13/10/13)
George Osborne hails China’s airport investment The Telegraph (13/10/13)
Chinese group in $1.2bn British airport development deal The Economic Times (13/10/13)
China in £800m Manchester airport deal Financial Times, Elizabeth Rigby and Lucy Hornby (13/10/13)
Boris and Osborne in China to push trade Sky News, Mark Stone (13/10/13)
What does China own in Britain? BBC News (14/10/13)
Questions
- What is a joint venture? What are the advantages and disadvantages of a joint venture relative to other business structures?
- How important are political ties with China?
- Do you view Chinese investment in the UK as an opportunity or a threat? Make a list for each side of the argument, ensuring you offer explanations for each reason.
- What macroeconomic benefits will the development of the Manchester Airport bring to the city?
- Will there be wider economic benefits to the rest of the UK, despite the investment being located in Manchester?
- Using the AD/AS model, illustrate and explain why investment is so important to the recovery of the UK economy.
Conservative Party leaders are considering the benefits of an above-inflation rise in the minimum wage. This policy has been advocated by both the Labour Party and the Liberal Democrats as a means of helping the lowest paid workers. From 2008 to 2013, minimum wage rates fell 5.2% in real terms: in other words, nominal increases were less than the increase in both the RPI and CPI (see UK minimum wage: a history in numbers).
