Minimum Wage Question 2

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A dozen questions about the National Minimum Wage


Question 2 of 12

2. How will the NMW be changed over time?


One of the most critical features of any minimum wage regime is how its level is changed over time, with different approaches seeking to balance two distinct dangers. On the one hand, a system of automatic adjustment – where the level of the minimum wage changes automatically in response to inflation, growth, and productivity– risks creating inflationary feedback loops that can make monetary policy more difficult to implement. On the other hand, a system in which minimum wages are adjusted by regulatory fiat allows officials to adjust the rate of increase to the needs of the economy (e.g. by increasing it by less than inflation when unemployment increases). The danger with this approach, however, is that it risks politicisation of these decisions, and creates incentives for politicians to promise to raise wages irrespective of the damage that might be done to the rest of the economy.

In this proposal, NMW adjustment is driven by a commission composed of experts on the labour market and representatives of organised business and labour, which would consider various factors before making a proposal to government on any adjustments that might be needed, with that recommendation being implemented only after the commission has had an opportunity to consider any comments from government and make adjustments to is, if needed. This is similar to the system in the UK, and, in principle, allows government to adjust the NMW in response to the needs of the economy, employers, workers and the unemployed on the basis of high quality empirical research, submissions from interested parties, and the expertise and judgment of members of the commission. This has the virtues of avoiding the potential of wage indexation, which can lead to inflationary spiral, and of allowing adjustments to the NMW to reflect economic conditions. It does, however, create the risk that debates and decisions of the commission might be politicised so that wage adjustments reflect the political cycle more than the business cycle.

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