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Minimum prices
- 1. Minimum Prices EdExcel Economics 1.4.1
- 2. Minimum Prices in Markets • A minimum price is a form of of government interven9on • To be effec9ve, a minimum price must be set above the normal free-‐market equilibrium • If it is set below, then it will have no impact • In some cases a minimum price takes the form of a guaranteed minimum price at which the government or a purchasing agency will buy the products of farmers • Examples including price support schemes in the EU • China has recently offered a generous minimum price support programme for their coGon farmers. Under the scheme, the government purchased coGon from farmers at a set price, building up a massive stockpile. A minimum price is a price floor for a market – suppliers cannot sell the product legally at a lower price.
- 3. The Debate over a Minimum Price for Alcohol • Concerns about alcohol fuelled violence and the public health problems associated with excessive drinking have fuelled the debate over alcohol prices. • In 2013 the UK government abandoned plans to introduce a minimum unit price for alcohol of 45p per unit. • Since 2014 there has been ban on the sale of alcohol below cost price, defined as the level of alcohol duty plus VAT. • A can of average strength lager cannot be sold for less than 40p • A standard boGle of vodka cannot be sold for less than £8.89. Arguments for a minimum price • Reduces nega9ve externali9es from heavy alcohol consump9on • Pubs may benefit from higher minimum prices in supermarkets • Can target cheaper, high strength drinks used by younger drinkers Arguments against a minimum price • Minimum price is a tax on responsible drinkers • Producers can agree voluntary policies on alcohol price / strength • BeGer to raise alcohol du9es which will raise extra tax revenues
- 4. Minimum Wage Debate: Lowest Paid Jobs in the UK 253.6 257.6 259.3 267.8 268.4 272.7 278.7 279.9 285.2 285.5 0 50 100 150 200 250 300 Bar staff Waiters and waitresses Launderers, dry cleaners and pressers Hairdressers and barbers Kitchen and catering assistants Leisure and theme park aGendants Retail cashiers and check-‐out operators Other elementary services occupa9ons n.e.c. Nursery nurses and assistants Cleaners and domes9cs Median full 9me gross weekly pay in £s
- 5. Minimum Wage for Adult Workers (Aged +21) 5.93 6.08 6.19 6.31 6.5 0 1 2 3 4 5 6 7 2010 2011 2012 2013 2014 Wage per hour in £s Update: The July 2015 budget introduces a new NaHonal Living Wage for workers aged 25 and above, and the Low Pay Commission will set out how it will reach 60% of median earnings by 2020. This means that the Na9onal Living Wage will reach the government’s target of over £9 by 2020.
- 6. Minimum Wage Analysis Diagram A minimum wage is a statutory pay floor that cannot be undercut Value of the UK living wage versus the minimum wage 2011-‐2014 (£ per hour) Year Living wage Minimum wage 2011 7.20 6.08 2012 7.45 6.19 2013 7.65 6.31 2014 7.85 6.50 Wage Rate Empl E1 Labour Demand W1 Labour Supply MW E2 E3 In July 2014, Germany voted to introduce a minimum wage of €8.50ph for the first 9me
- 7. Minimum Wage Analysis – Importance of ElasHcity Wage Rate Empl E1 Labour Demand W1 Labour Supply MW E2 E3 Wage Rate Empl E1 Labour Demand W1 Labour Supply MW E2 E3 Standard minimum wage diagram suggests that a pay floor will lead to a contrac9on of employment. But this depends on the level at which the minimum wage is set. If labour demand is inelasHc, then a higher minimum wage will cause only a limited contrac9on on the level of labour demand.
- 8. EvaluaHng Arguments for a Minimum Wage Case for a higher level of minimum wage in the UK economy Arguments against a rise in the naHonal minimum wage • Equity jusHficaHon: Every job should given fair pay linked with skills/ experience of an employee. • Jobs: Higher minimum wage adds to the costs of employing workers and might cause higher unemployment • Poverty reducHon: A minimum wage boosts the take-‐home pay of thousands of lower paid workers • Small businesses: Many smaller businesses struggle to make a profit -‐ risk of a rise in business closures • Training: It encourages firms to up-‐ skill their workers and can lead to higher labour produc9vity • Training: There are beGer incen9ves for training than a minimum wage e.g. tax relief on appren9ceships • IncenHves: Will improve incen9ves for people to look for paid work • CompeHHveness: Might make many UK businesses less compe99ve in global markets • AnH-‐discriminaHon: A way of tackling discrimina9on of low-‐paid female / younger workers • InflaHon: Higher labour costs might cause higher infla9on which then lowers real incomes
- 9. Further EvaluaHon: AlternaHves and “It Depends On” Policy IntervenHon AlternaHve EvaluaHve comment Living Wage An op9onal alterna9ve to the minimum wage – a growing number of firms are signing up to this Income Tax Reforms Cuhng the basic rate of income tax or liiing the tax free allowance will boost work incen9ves Benefit reforms Linking benefits to par9cipa9on on work programmes – poli9cally controversial Measures to raise labour produc9vity Most important in long run – higher produc9vity boosts wages / incomes The effects of a naHonal minimum wage on employment, inflaHon and real incomes of those affected depends on.. Price elas9city of demand of the firms’ products i.e. can they pass on higher costs and con9nue to sell their products The state of the economy i.e. whether firms are sufficiently profitable to be able to absorb a higher minimum wage Whether a higher minimum wage mo9vates workers to improve their produc9vity – which will lower unit costs Depends on the magnitude of the change in the minimum wage and the 9me scale over which it happens
- 10. Minimum Prices EdExcel Economics 1.4.1