top of page
  • Writer's pictureEvelyn Chen

The UK Minimum Wage

Inequality refers to the disparity in income and wealth between people in society. The Gini coefficient is commonly used to measure income inequality, wherein 0 represents perfect inequality and 1 represents perfect inequality. Another measure is the 90/10 ratio, which is the ratio of the household at the 90th percentile to the household at the 10th percentile. The 99/50 ratio compares the very top earners to the median household income. Not only does inequality occur between countries but it also occurs within a country between its various regions: in the UK the weekly median earnings of the South East, East of England and London exceed the UK average.

Poverty is a situation in which an individual can either struggle to obtain necessities required to sustain human life such as food (absolute poverty) or the individual does not have the material means to fully participate in society (relative poverty)—in the UK people are in relative poverty if their household income is less than 60% of the median. The rate of absolute poverty has fallen from 40% of individuals living in the UK in 1995/6 to 20% in 2015/16 after housing costs. Relative poverty has stayed around 23% of the UK population from 1996/6 to 2015/6.

In the UK, the level of income inequality is high compared to other advanced European countries. It is also high by historical standards: with housing costs taken into consideration, income inequality has been forecasted by the Resolution Foundation to rise to record highs. Original inequality remains high since the labour market rewards highly skilled workers much more than those with few skills in the UK. This can be attributed to globalisation and technological advancements. Technological advancements reduced demand for low skilled workers and made skilled workers who effectively used the new technology more productive and so more demanded; due to globalisation the UK specialised in professional services and outsourced jobs in industry to countries such as China, thus reducing demand for low skilled workers in the UK. Therefore, there is income inequality between highly educated people and those with fewer skills. Indeed, in 2010, the pay gap between people with a degree and people with only GCSE.

One measure to alleviate this is by introducing the National Minimum Wage, which came into effect in 1999. It currently stands at £7.50 for those 25 and over and £4.05 for those under 18. The effect of the NMW is to increase the wage set by employees for their workers, which ceteris paribus increases the disposable income of the workers and thus their consumption, which thereby increases their living standards. Furthermore, it provides a strong incentive for people to work, thus reducing the level of unemployment and stopping people from ending up in the poverty trap. The poverty trap is when a significant amount of capital is required of someone to escape poverty and when individuals lack this capital, they may also find it difficult to acquire it, creating a self-reinforcing cycle of poverty.

However, the supply of labour exceeds demand when the national minimum wage is implemented—on the diagram, the excess supply of labour i.e. unemployment is represented by the triangle of ABE. Therefore, there is a trade-off between employment and the living standards of workers. The NMW did not appear to cause unemployment during the NICE (non-inflationary constant expansion) period of 1997 to 2007 but during the subsequent recessions when businesses have been less willing to hire workers, the NMW could have had a negative impact on employment.

Moreover, despite large differences in living costs between regions, there is no regional variation of the NMW in the UK. As a result, workers living in London have a much poorer standard of living than workers living in the North-East. Nevertheless, there is a living wage for London currently standing at £9.15 but it is not legally binding.

Nevertheless, the NMW does appear to have reduced income inequality according to data. The decline in wage inequality has been most marked in the lowest-wage segments of the labour market. For young workers, around half of the change in wage inequality can be ascribed to the NMW. For older workers, the impact of the NMW is smaller: but the overall trends are weaker and the NMW seems to be able to explain all the observed changes.

11 views0 comments

Recent Posts

See All


Post: Blog2_Post
bottom of page