Low Wages and the Minimum Wage: When "Minimum" Doesn't Feel Like Enough

Low Wages and the Minimum Wage: When "Minimum" Doesn't Feel Like Enough

This could be you: You've just landed your first part-time job at a popular coffee chain. You're excited about earning your own money, but when you get your first payslip, reality hits. After taxes, your hourly wage barely covers the cost of the fancy drink you serve hundreds of times per shift. Sound familiar? Let's dive into the economics of low wages and the minimum wage - a topic that affects millions of workers not only across the UK but worldwide.

The Wage Gap Reality Check

While the average (mean) wage in the UK as of 2024 sits at around £17.20 per hour according to the Office for National Statistics, there's a massive disparity across industries. If you're flipping burgers or serving coffee, you might be earning close to the National Living Wage of £11.44 per hour (for those 21 and over), which feels miles away from that national average.

When your mates are posting Instagram stories of their weekend getaways while you're counting pennies to afford a cinema ticket, it's worth understanding why these wage differences exist and what might be done about them.

How Wages Are Determined: The Economics Behind Your Payslip

Before we jump into minimum wage debates, let's refresh our memories on how wages are set in a competitive and free market. Don't worry - I'll keep this as painless as possible!

Supply and Demand: Not Just for Designer Trainers

Just like how the latest Nike Dunk Low's price skyrockets when everyone wants them but stocks are limited, your wage is determined by similar forces:

The demand for your labour is basically how much an employer is willing to pay you. This equals:

• The extra output you produce × the revenue from selling that output

• In other words: how much profit you generate for the business

Imagine you work at Greggs. If you can serve 30 customers per hour, each spending an average of £5, and your wage is £11.44, you're generating about £150 in sales while costing the company less than £12 in wages (plus some overhead costs). That's why they hired you!

The supply of labour comes from workers like you:

• How many people are willing and able to do your job at different wage rates

• If Greggs paid just £8 per hour, they'd struggle to find employees

• If they offered £20 per hour for the same work, they'd have queues of applicants around the block

• The more people are willing and qualified to do your job the less you will earn, how many people aged 16-18 are willing to work at Greggs on Saturdays?

Finding the Sweet Spot

In a perfectly competitive labour market (which rarely exists in real life, but let's pretend it does), wages settle at the point where supply meets demand. If there are loads of people who can do a particular job, wages tend to be lower. If the job requires rare skills, wages go up.

Boosting Low Wages: Three Main Options

There are three primary ways to increase wages:

1. Increase the demand for labour - If workers become more productive or valuable to employers, wages rise. This is why gaining skills through education or training can boost your earning potential.

2. Decrease the supply of labour - This happens when fewer people can or want to do a particular job. For example, when Brexit reduced the number of EU workers in the UK hospitality sector, wages rose as restaurants competed for the smaller pool of workers.

3. Government intervention - And here's where the minimum wage enters the scene!

The UK's Minimum Wage Journey

Unlike the American system, the UK's minimum wage has a more recent history. The National Minimum Wage was first introduced in 1999 under Tony Blair's Labour government, starting at just £3.60 per hour for adults.

Fast forward to 2024, and we now have the National Living Wage for workers aged 21 and over at £11.44 per hour, while those aged 18-20 receive £8.60 per hour. That's quite a jump!

This progressive increase represents one of the most significant policy interventions in the UK labour market. In fact, when adjusted for inflation, the UK minimum wage has generally increased in real terms over the past decade, unlike the American minimum wage that has often fallen in real terms. In case anyone is interested, the American hourly minimum has increased almost 20 times over the years, from $0.25 in 1938 to $5.15 in 1997 and to $7.25 in 2009 (this is the current minimum wage in the USA, in 2025).

The Economics of Setting a Price Floor on Labour

So what happens when the government says "you must pay workers at least £11.44 per hour" when the market equilibrium wage might be lower for some jobs?

Let's imagine the competitive market wage for entry-level workers in a small town café might naturally settle at £9 per hour, but the government mandates a minimum of £11.44.

The Good, the Bad, and the Economics

At £11.44 per hour:

1. More people want these jobs - University students, retirees looking for part-time work, and others might enter the labour market.

2. Employers hire fewer workers - That café owner might decide to:

   • Cut staff hours

   • Invest in a self-service ordering kiosk

   • Expect each worker to handle more tasks

   • Raise prices on those flat whites and avocado toast

3. Some businesses adapt, others struggle - The Pret A Mangers and Costas of the world might absorb higher costs, but your local independent café might have to close earlier or open fewer days.

The Great Minimum Wage Debate

This topic gets economists more heated than a debate about whether a Jaffa Cake is a cake or a biscuit. The fundamental question is: How many jobs are lost when the minimum wage increases, and who loses them?

What UK Research Shows

Recent UK studies suggest that minimum wage increases have had smaller negative employment effects than traditional economic theory predicted:

1. The Low Pay Commission, which advises the government on minimum wage levels, consistently finds modest or negligible employment effects from minimum wage increases.

2. After the substantial increase in 2016 (when the National Living Wage was introduced), unemployment didn't spike as some feared. In fact, UK employment reached record highs pre-pandemic.

3. However, some studies suggest subtle adjustments: fewer hours rather than fewer jobs, reduced training opportunities, or higher prices passed on to consumers.

The Real-World Complexity

In 2023, Tesco introduced automated checkouts in more stores while simultaneously raising wages above the minimum wage. Was this a direct cause-and-effect? It's complicated. Automation was happening anyway, but higher wage costs might have accelerated the process.

Meanwhile, during the post-pandemic recovery, many hospitality businesses found themselves raising wages well above the minimum to attract staff, suggesting the labour market dynamics sometimes override minimum wage considerations altogether.

The Impact on Different Groups

The impact of minimum wage increases isn't equally distributed:

1. Young workers, especially those with fewer qualifications, may face the highest risk of reduced hours or job opportunities.

2. Small businesses in low-wage regions (like parts of Northern England or Wales) feel more pressure than businesses in high-wage London.

3. Some evidence suggests higher minimum wages in the UK have actually reduced university enrollment for some groups, as the improved wages make immediate employment more attractive compared to further education.

Is Raising the Minimum Wage Effective at Fighting Poverty?

This is where things get properly interesting. The minimum wage isn't as targeted at poverty as many assume:

1. Many minimum wage earners aren't from the poorest households. Think of university students working part-time while living with middle-class parents.

2. Many of the poorest households don't have anyone working at all, so minimum wage increases don't help them directly.

3. The UK's benefit system (Universal Credit) can reduce the impact of wage increases as benefits are gradually withdrawn as income rises.

A 2022 Institute for Fiscal Studies report found that only about 17% of minimum wage increases go to households in the bottom income quintile.

The Bottom Line: It's Complicated

Unlike many economic policies where economists are sharply divided, views on the minimum wage in the UK have somewhat converged in recent years. Most agree that the UK's careful, evidence-based approach to setting the minimum wage (using the independent Low Pay Commission) has helped avoid major negative employment effects.

However, many economists also agree that while the minimum wage is an important tool, it works best as part of a broader policy toolkit including:

• Skills training to help workers move up to higher-paid roles

• In-work benefits for those with family responsibilities

• Educational support to improve long-term earning potential

• Regional development to create more good jobs outside London and the Southeast

What This Means for You as an IB Economics Student

When you're analysing minimum wage policies for your IB exams:

1. Consider the context - Different labour markets respond differently to minimum wage increases.

2. Evaluate the evidence - Be specific about which studies you're citing and their limitations.

3. Think about trade-offs - Economics is rarely about "right" and "wrong" policies, but about understanding the costs and benefits of different approaches.

4. Connect to other policies - How does the minimum wage interact with taxation, benefits, and education policy?

Next time you're sipping that £4 oat milk latte or ordering takeaway via an app, think about the complex economic forces determining how much the people serving you earn. And remember that behind the supply and demand curves we draw in class, there are real people whose livelihoods depend on these policies getting it right.

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