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Understanding the specific causes of environmental failure

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The Exam Performance Specialists | tutor2u Economics

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We've just flicked the switch on moving all our digital resources to instant digital download - via our new subject stores. For every subject you can now access each digital resource as soon as it is ordered. This will always be the latest edition of each resource too (and we'll update you automatically if there is an upgraded version to use).

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Independent Study Checklist

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How much inequality is too much? BBC article

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How much inequality is too much? BBC article

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The richest 10% of Americans earn half of all of income. In Britain, the top 10% hold 40% of all the income.

Inequality isn't just an issue for rich countries: a billion people have been lifted out of poverty since 1990, but inequality has also been rising in many countries too.

Four experts talk to the BBC World Service Inquiry programme about the effect inequality has on growth and prosperity.

Deirdre McCloskey: Capitalism is not the enemy
Deirdre McCloskey is Distinguished Professor of Economics, History, English, and Communication at the University of Illinois at Chicago. The daughter of a Harvard Professor, her brother became a university cleaner.
"You can't force people to take advantages that are placed in front of their nose, and that's my brother's case. No amount of income redistribution or socialist schemes to give my brother more opportunities would have made any difference at all to his life.

"If people strive, some of them succeed and get rich, at least momentarily until other people strive and compete with them. This striving turns out to be good for all of us.

"The percentage of people in the world living on $2 (£1.30) a day - an appalling level of income - has halved in the last 30 years. That's not by foreign aid or redistribution. It's by letting the economy function in a more innovative way.

"The wrong way to cure inequality is to attack the people who are taller, or have better parents, or live in richer countries. The way to do it is to uplift the poor. I approve of being taxed to help the very poor. But I don't want to kill the goose that laid the golden eggs. Capitalism is not the problem, it's the solution.

"The growth in the last couple of centuries has been astounding. It's a factor of 30 - about 3,000% per head for the average English or American person. Explosive, unprecedented growth. Meanwhile, inequality has gone up and down a little bit.

"If you were to make a rule that the chief executive could only earn 50 times the shop floor employee, that would not reduce inequality substantially.

"I'm very relaxed about [inequality] as long as it's not force or fraud that caused it."

Jared Bernstein: Inequality impedes growth
Jared Bernstein is a senior fellow at the Center on Budget and Policy Priorities in Washington DC, and a former economic advisor to President Obama.
"I was a member of the President's economics team during the worst recession we've had since the Great Depression. The responsibility to try to turn that around was huge.

"This wedge of inequality between growth and the income of working families undermines the basic incentive that hard work will be rewarded.

"I call it the shampoo cycle - bubble, bust, repeat. And because middle and low income families lack the income growth they used to see, they borrow to make the difference. That creates large leverage bubbles which explode and hurt growth.

"Once wage inequality gets too high, and you have lots of low income people stuck in tough neighbourhoods that are segregated by income and race, and they have fewer libraries and a more difficult learning environment, you begin to see this connection between high levels of inequality and barriers to opportunity.

"You don't necessarily see that in today's economy because that's a cumulative process, but it's very possible that we'll see that in economies 20 years from now when these children come into the job market.

"If you go back to the period where productivity and incomes for middle class families were growing together - in the US that would be back to the mid 1970s - you'll see that the top 1% held about 10% of all income.

"Now it's 20 times that. That's too much. I'm not saying we necessarily have to get back to the late 1970s level, but I do think that a good metric here would be that the income of middle income families would grow closer to the rate of productivity growth, and that's something that we haven't seen for a while."

Jonathan Ostry: Opportunity more important than inequality
Jonathan Ostry is deputy director of the Research Department of the International Monetary Fund.
"We don't have a threshold level for how much inequality is too much. We don't have a magic number. Sometimes a rise in inequality is perfectly compatible with healthy growth and prosperity, and in other cases the rise has gone way too far.

"When China opened up, it not only took off in terms of economic growth, but there was a marked and quite significant increase in income inequality. I'd be prepared to venture that was a good increase in inequality. Sometimes you need to have a little bit more inequality in order to get growth going as part of deregulating of your economy.

"Think of the very high levels of inequality that prevailed in Brazil when President Lula came to office, and the steps he took with the Bolsa Familia conditional cash transfer programmes. His policies were successful without jeopardising economic growth.

"I would want to be sure that in a country with a lot of inequality those at the bottom still had opportunities to be well-educated, to have adequate nutrition, and were not shut out from credit and banks. Likewise if there was a fair degree of equality, but nevertheless those at the bottom didn't have adequate opportunities, I'd be concerned.

"So for me it would be more a question of whether there were adequate opportunities for the less well-off in society. Provided that was the case I wouldn't be overly concerned that a given level of inequality was causing great harm.

"[However] it turns out that income equality is an important factor in separating countries that have been successful at sustaining growth for long periods, versus those that have enjoyed spurts of growth which have fizzled out rather quickly. Too much inequality can undercut the ability to sustain growth.

"In more equal societies, those that are more socially cohesive, governments are able to take measures that have buy-in from the population at large. Therefore they can right their economies more quickly.

"In more unequal, less socially cohesive societies, people don't buy the notion that if the economic ship is righted, everyone will benefit. They're more likely to oppose the painful short-term measures that governments need to take to right the economic ship. And so righting that ship becomes much more difficult in less equal societies."

Branko Milanovic: Beware rising inequality within countries
Professor Branko Milanovic has spent his career studying inequality, and is now a visiting professor at the City University of New York.
"We need inequality. Perfect equality, everybody having the same income, doesn't exist anywhere, nor has it. Obviously some countries - maybe China during the cultural revolution - came relatively close, but some inequality has always existed.

"Without inequality you lack incentives to do practically anything - to work, to invent new things or to invest. Nobody is going to do things for nothing and we know that monetary rewards are really crucial, so this is the good part of inequality. We should not forget that inequality is indispensible for the development of a society.

"Globalisation has been very good for the middle classes in the emerging markets - China in particular, parts of India, Thailand, Indonesia. They are still not level in terms of income with the middle class in the rich world, but it's improving, On the other hand, we have essentially a stagnation of middle class incomes in rich countries, a very interesting and a potentially politically destabilising development.

"If the gaps keep on increasing as they've increased in the last 20 years, you would end up with two types of societies within a single country. If there is no sufficient middle class and if the poor really are very far from the rich, then you really cannot speak of a single society.

"We could end up with a kind of a global plutocracy, this global one per cent or even half a per cent that are very similar among themselves, but really belong to different nations.

"We might have a situation that most of global inequality is due to inequalities within nations which was more or less the situation 200 years ago. So we may be really going back to the situation that existed before the industrial revolution."

The Inquiry is broadcast on the BBC World Service on Tuesdays from 12:05 GMT. Listen online or download the podcast.

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The richest 10% of Americans earn half of all of income. In Britain, the top 10% hold 40% of all the income. Inequality isn't just an issue for rich countries: a billion people have been lifted out of poverty since 1990, but inequality has also been rising in many countries too.

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ECON 3 Business Economics Flashcards | Quizlet

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Start studying ECON 3 Business Economics. Learn vocabulary, terms, and more with flashcards, games, and other study tools.

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Government Intervention and Market Failure

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Government Intervention and Market Failure

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Barriers to Entry and Exit

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Profits in an Imperfectly competitive Market

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Profits in a Perfectly Competitive Market

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AR and MR in inperfectly competitive market RECAP (1)

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The National Living Wage What next for the low pay problem

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The National Living Wage What next for the low pay problem

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London School of Economics Article

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econ3rs2012

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Price of Ineqaulity Robert Peston Radio 4 Podcast 2

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Price of Ineqaulity Robert Peston Radio 4 Podcast 2

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Episode 2, The Price of Inequality - BBC Radio 4

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Robert Peston explores the alarmingly widening gap between rich and poor since the 1980s.

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Price of Inequality Robert Peston Radio 4 Podcast 1

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Price of Inequality Robert Peston Radio 4 Podcast 1

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GINI index (World Bank estimate) from The World Bank: Data

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Fifty years ago, Corrado Gini, inventor of the Gini coefficient, which measures income inequality, died. How does it work, asks Chris Stokel-Walker.

When Italian statistician - and former fascist - Corrado Gini died in Rome on 13 March 1965, he could not have known that 50 years on, the UN would still use his name in their annual rankings of nations.

"The Gini coefficient provides an index to measure inequality," says Antonio Cabrales, a professor of economics at University College London.

It is a way of comparing how distribution of income in a society compares with a similar society in which everyone earned exactly the same amount. Inequality on the Gini scale is measured between 0, where everybody is equal, and 1, where all the country's income is earned by a single person.

The answer

The coefficient is between 0, where everyone earns the same, and 1, where one person earns all the money

It is widely used as a measure of inequality

Gini developed his coefficient in 1912, building on the work of American economist Max Lorenz, who published a hypothetical way to depict total equality - a straight diagonal line on a graph - in 1905. The difference between this hypothetical line and the actual line produced of people's incomes is the Gini ratio.

In 2012-13, the UK's Gini score for income inequality was 0.332, as measured by the Office for National Statistics. Individual cities vary in their equality - London is the most unequal, as measured by the Joseph Rowntree Foundation, while Sunderland is the most equal.

"The Gini has been around for a very long time, and it's very technically sound if you want to measure income inequality across the whole population," explains Andy Sumner, director of the International Development Institute at Kings College, London. "But one might say the Gini is oversensitive to changes in the middle, and undersensitive at the extremes."

The coefficient doesn't capture very explicitly changes in the top 10% - which has become the focus of much inequality research in the past 10 years - or the bottom 40%, where most poverty lies. As a result, Sumner and colleague Alex Cobham put forward an alternative - the Palma ratio - which does.

"We tried to come up with a measure more sensitive to changes at the top which people are more interested in, and which is more intuitive," says Sumner. If the richest 10% of the population has five times the income of the bottom 40%, a country's Palma ratio is 5.

The idea is picking up steam. The Palma ratio has since been listed in the OECD rankings of countries' inequality, and in annual UN Human Development reports, alongside the Gini. Whether Corrado Gini's coefficient will last another half century is uncertain.
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Fifty years ago, Corrado Gini, inventor of the Gini coefficient, which measures income inequality, died. How does it work, asks Chris Stokel-Walker. When Italian statistician - and former fascist - Corrado Gini died in Rome on 13 March 1965, he could not have known that 50 years on, the UN would still use his name in their annual rankings of nations.

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Revision N

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AS-Level Economics Video 17 - Negative Externalities

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Video 17 out of 50 covering the entire AS-Level Economics course. This video examines negative externalities including the concepts of private, external and social benefits and costs - but solutions to externalities are in a later video!

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Why markets fail when providing those goods that generate external benefits

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Cost Benefit Analysis Benefits and Drawbacks

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Cost Benefit Analysis Benefits and Drawbacks

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AS-Level Economics Video 21 - Cost-Benefit Analysis

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Video 21 out of 50 videos covering the AS-Level Economics course. This video explains the process of cost-benefit analysis and the difficulties and inaccuracies that result from CBA.

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FREE APP - get all of the videos on this channel on your phone. Put myapp.is/Economics%20Diagrams in your phone web browser and follow the instructions. Income Inequality can be measured graphically by a Lorenz Curve or mathematically using the Gini Coefficient. This video explains how both of these work

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Trade Unions in

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These slides are from our January 2014 revision workshops for unit 3 microeconomics. They focus on some of the arguments surrounding the possible introduction ...

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Many thanks to Newsnight for providing the material for a lesson about monopsony power - if nothing else, it makes a change from taking Tesco as the model for this topic. On Friday, Newsnight carried a report about Premier Foods, a conglomerate which owns many different grocery brands such as Mr Kipling, Ambrosia, Bisto and Oxo. Their allegation is that Premier Foods has been using its power as a major customer to request payments from its suppliers; if they don't pay up, they are 'delisted' from supplying the company. In other words, monopsony power.

The online report comes with a 5-minute video clip which sets up the topic nicely. Newsnight's Laura Kuenssberg interviews engineer Bob Horsely, who had a contract to supply maintenance services to Ambrosia's factory in Devon. He received a letter from Premier Foods saying that "We are aiming to work with a smaller number of strategic suppliers in the future that can better support and invest in our growth ideas. We will now require you to make an investment payment to support our growth." When he queried this, he received another letter: "We are looking to obtain an investment payment from our entire supply base and unfortunately those who do not participate will be nominated for de-list."

Premier Foods has been in financial trouble recently, and says that it is trying to invest in growth; it makes the point that, if it succeeds, that can only be to the benefit of its suppliers. However, there are calls for this case to be referred to the Competition and Markets Authority. If a supermarket behaved like this, it would be against The Groceries Code which regulates relationships between supermarkets and their suppliers (....but see below*); however, that code doesn't cover manufacturers like Premier Foods.

The article presents a good opportunity for a class exercise, leading to questions like:

- What form of market failure is demonstrated by this case?

- Can Premier Food's statement that "...our suppliers benefit from opportunities to secure a larger slice of our current business. They also stand to gain as our business grows in the future." be justified?

- Should the Groceries Code be extended to include producers as well as retailers?

- What other actions could governments take to prevent this market failure?

- What are the risks of government failure?
* Supermarkets and Suppliers - back to Tesco
There can be no doubt that in this relationship, the power is in the hands of the supermarkets: according to an online report, Britain's top ten supermarkets owe about £15billion to suppliers for goods at any one time, giving them leverage to 'negotiate' extra payments.

However, listening to The Report on Radio 4 recently , I was really taken aback by the extent of those pressures, as they were explained by current and ex-suppliers and ex-staff of Tesco.

As much as a third of Tesco's gross profit comes, not from sales of goods and services to customers, but from payments they receive from suppliers. Some of those are called "rebates", reported here in the FT: "Rebates are payments that Tesco receives from suppliers for hitting a certain level of sales, or for support for promotions. For example, Coca-Cola could offer a percentage discount on 2-litre bottles if 20m of them were sold in a specific period - but it will only pay this rebate if the sales target is hit. Tesco's UK sales volumes have dropped as it loses market share to competitors, so there is a risk that such volume-driven rebate targets could be missed." The report in the FT is a fascinating one, very accessible to students, about the way in which such payments are pre-estimated by the retailers in order to be included in their accounts, and this practice has been largely responsible for the 'black hole' of £250mn in Tesco's accounts.

Rebates are clearly common in the industry, and a report in The Grocer implies that many suppliers see this as 'fair enough' - if Tesco can shift huge numbers of the goods, the suppliers and manufacturers benefit by selling more, producing at closer to full capacity and gaining economies of scale. However, there are other payments as well. There are listing or gate fees, in which the supplier pays tens or hundreds of thousands of pounds in order to get their products onto Tesco's shelves, more fees in order to get them displayed at eye level, and more recently, payments demanded in order to avoid having products delisted. The radio report carried several instances of small scale suppliers who simply couldn't make such payments, and so lost their contract to supply. As a sales negotiator quoted in The Grocer says, when a buyer says 'give me £4mn or I won't stock your product any more', things are getting desperate. Meanwhile, Groceries Code Adjudicator Christine Tacon has urged suppliers to come forward with "hard evidence" to allow her to investigate alleged breaches of the Code.

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A lesson in monopsony power | tutor2u Economics

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Many thanks to Newsnight for providing the material for a lesson about monopsony power - if nothing else, it makes a change from taking Tesco as the model for this topic. On Friday, Newsnight carried a report about Premier Foods, a conglomerate which owns many different grocery brands such as Mr Kipling, Ambrosia, Bisto and Oxo.

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10 ways to turn a good paper into a great one

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Revision advice for AS and A2 economics papers

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A2 MicroStrong Exam TechniquesStepping stones to great A2 grades Geoff Riley, FRSA Tutor2u

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Wage differentials in 2014 Interesting article.

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Wage differentials in 2014 Interesting article.

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The average full-time pay gap between men and women is at its narrowest since comparative records began in 1997, official figures show.

The difference stood at 9.4% in April compared with 10% a year earlier, the Office for National Statistics (ONS) said, a gap of about £100 a week.

However, the change was the result of men's wages dropping faster than women's in real terms.

Allowing for inflation, weekly earnings for all fell by 1.6% compared to 2013.

Before taking inflation into account, the £1 rise in full-time median gross pay for men and women to £518 a week was the slowest rise since records began in this form in 1997.

'Sign of progress'

The 9.4% gender pay gap compares with the gap of 17.4% that was recorded in 1997.

Hourly earnings figures reveal that, in April 2014, women working for more than 30 hours a week were actually paid 1.1% more than men in the 22 to 29 age bracket and, for the first time were also paid more in the 30 to 39 age bracket.

Although weekly earnings suggest men are paid more in all age groups, the hourly earnings level is the preferred measure used by the ONS to judge the pay gap.

Chancellor George Osborne said the figures were "another sign of progress in the fight for equal pay".

The gender pay gap for all employees, full-time and part-time, was also the lowest on record at 19.1%, down from 19.8% in 2013.

The TUC said the gap could be cut further with better paid, flexible, part-time work opportunities, and better paid leave for fathers to encourage more equal parenting.

The government said that, from next year, it was extending the rights for shared parental leave. It had also invested in training and mentoring for women to move into higher skilled, higher paid jobs, and guidance to women looking to compare their salaries with male counterparts.

Pay slips

The ONS figures also showed that the growth in wages was the slowest since records began in 1997.

Full-time median gross pay totalled £518 a week in April, up 0.1% - or £1 - on a year earlier. That is the equivalent of nearly £27,000 a year. The median average is the mid-point of all wages top to bottom.

The figures reflect the squeeze faced by workers who have seen wages rise, but prices rising faster.

When the rising cost of living is taken into account, real earnings fell over the same period.

Those who are unable to secure full-time, continuous employment have been at the sharp end of this situation.

Wages for the 70% of people who have been continuously in their job for more than a year have gone up by 4.1% in the past year - more than three times the rate of inflation. However, those in more sporadic employment - generally lower skilled jobs - have pulled the average wage down.

Frances O'Grady, general secretary of the TUC, said: "Ordinary households are not sharing in the recovery and the recession in their wages continues despite the economy's return to growth."

Median gross weekly earnings for full-time employees increased by 1% in the public sector and by 0.7% in the private sector, the ONS said. Gross median pay for all private sector staff was £21,259 and for public sector staff it was £24,302.

However, the ONS warns that comparing private and public sector wages can only reflect part of the picture. This is because the figures do not show differences in the rates of pay for the same type of job.

For example, many of the lowest-paid occupations, such as bar and restaurant staff, hairdressers, and cashiers, are mainly private sector jobs, while there are a larger proportion of graduate-level and professional occupations in the public sector.

At the highest level of pay, it is likely that private sector wages are higher than those in the public sector.

Low pay

The figures show that people in the bottom 10% of the pay scale earned less than £288 per week, or nearly £15,000 a year. The top 10% of full-time employees earned more than £1,024, or £53,248.

Since 1997, the gap has been relatively consistent, the ONS said.

There were 236,000 jobs with pay less than the national minimum wage in April, representing 0.9% of all jobs. About 9,000 of those were held by 16 and 17-year-olds, and 31,000 by 18 to 20-year-olds, new ONS figures also showed.

Employers can pay someone below the minimum wage legitimately, for example by providing accommodation tied to the job, as is the case for many hotel workers.

The survey is based on a sample of tax returns, so excludes self-employed workers.

Interesting statistics from the survey

How much do people earn? The UK median wage is £22,044 for all workers, full-time and part-time. Men in full-time work earn on average £29,441 and women in full-time jobs earn £23,889.

Where is pay the highest? Whitehaven in Cumbria comes out top, home to the Sellafield nuclear complex and a new marina. Employees there have a median salary of £37,910.

It is followed by London where the median wage across all workers is £29,696. That is followed by Basingstoke (£27,760), Newbury (£27,287), and Reading and Bracknell (£27,430) - all in the Thames Valley area.

Where in Scotland are median earnings the highest? The Shetland Islands, at an average of £24,752, just beats Aberdeen (£24,510) and Edinburgh (£24,738).

Where are the lowest paid people working? Ludlow in Shropshire at £14,033.

What do different jobs pay? Train drivers' full-time median pay was £47,956. For printers, it was £25,922. For taxation experts it was £44,641. Bank and post office clerks received £20,873. Solicitors were paid £41,178. Air traffic controllers received £78,874, computer programmers and software developers were paid £40,007 and nurses were paid £31,641.

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The average full-time pay gap between men and women is at its narrowest since comparative records began in 1997, official figures show. The difference stood at 9.4% in April compared with 10% a year earlier, the Office for National Statistics (ONS) said, a gap of about £100 a week.

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The minimum wage would rise to £8 an hour over the course of the next parliament if Labour wins the general election, the party has pledged.

Leader Ed Miliband said it was "not good enough" that one in five people in the UK were on low pay.

But the Conservatives said they had already delivered an above-inflation increase as, from October, the minimum wage will rise from £6.31 to £6.50.

The minimum wage for adult workers was £5.80 at the time of the last election.

Chancellor George Osborne suggested, in an interview with BBC Political Editor Nick Robinson in January, that the minimum wage would rise to £7 an hour in 2015 to return the level it was at before the economic downturn.

'Wealth creators'

The rate is recommended by the Low Pay Commission, which is overseen by Liberal Democrat Business Secretary Vince Cable.

Government sources have suggested that the rate would probably rise to £8 by the end of the next Parliament if it continued on current trends. The TUC has called for the minimum wage to increase to £10 an hour.

Mr Miliband announced the policy in interviews with the Sunday Mirror and Observer newspapers as Labour's annual conference got under way in Manchester.

The party says the £1.50 per hour increase would be worth £60 a week, or £3,000 a year, for the lowest paid.

"Too often people think that politics doesn't care about them," the Labour leader told the Sunday Mirror.

"They are the wealth creators just as much as the top entrepreneurs and the top business people. And we've got to reward them."

He said the party would show "how we can become a country that rewards hard work once again".

In the Observer interview he added: "It is not good enough for us that one in five people in our country go out to work, make their contribution and are in low pay."

'Save money'

The proposed increase would affect around 1.4 million jobs. It would be introduced in annual stages by the Low Pay Commission before October 2019.

Mr Miliband's proposed rate is said to be similar to that in force in Australia and EU countries such as Belgium and Germany, but lower than in France and New Zealand.

The Labour leader rejected claims it would cost jobs and be unaffordable for the public sector, such as local councils and hospitals, who are among the biggest employers of low-paid staff.

"It is actually going to save money in benefits," the Labour leader told BBC1's Andrew Marr Show.

"What is happening at the moment is that we are spending billions of pounds subsidising employers who are paying low wages, billions of pounds in benefits, tax credits and housing benefit.

"It is going to have no cost at all to the public sector, and it is the government's own figures that say that."

'Crashing economy'

But business lobby group the CBI said increasing the level of the minimum wage by the amount suggested by Mr Miliband would cost jobs.

CBI deputy director general Katja Hall said: "The minimum wage is set at the highest rate it can be without putting job creation at risk at the moment."

She accused Mr Miliband of trying to "politicize" the Low Pay Commission, adding: "Raising wages in this way would put serious strain on businesses, particularly hard-pressed smaller firms with tight margins, which would end up employing fewer people. Instead, politicians should address how people move on in their careers, through training and better skills, helping them move to higher paying roles over time."

Conservative Culture Secretary Sajid Javid said people would not take "lectures" from Labour on helping people on low pay.

"By crashing the economy, Labour made everyone poorer and they haven't learnt their lesson," he said.

"Ed Miliband would make people worse off with the same failed policies that got us into a mess in the first place - more wasteful spending, more borrowing and higher taxes."

'Dangerous'

The Liberal Democrats said the best way to help the low paid was to cut their taxes.

"Labour has refused to back tax cuts for working people," a spokesperson added.

The national minimum wage is the lowest hourly rate at which workers must legally be paid, although there are lower levels for workers aged 18-20, those under 18 and those working on an apprentice scheme.

It was introduced by Labour in 1997 and the level is reassessed annually by the Low Pay Commission, which then makes a recommendation to ministers.

October's above-inflation increase of 19 pence (3%) - announced in March - will be the first time in six years that the rise is higher than inflation.

The rate for 18 to 20-year-olds will go up by 10p to £5.13 an hour, a 2% increase.

The rate for those aged 16 and 17 will rise by 7p to £3.79, also a 2% rise.

Apprentices will earn an extra 5p an hour, taking their wages to at least £2.73.

In August the Consumer Price Index rate of inflation was 1.5%.

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The minimum wage would rise to £8 an hour over the course of the next parliament if Labour wins the general election, the party has pledged. Leader Ed Miliband said it was "not good enough" that one in five people in the UK were on low pay.

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Does the NMW create unemployment and a benefit culture?

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Does the NMW create unemployment and a benefit culture?

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How the Minimum Wage Creates Unemployment

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How the minimum wage hurts the ones that it is supposed to help, and creates unemployment.

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Effect of Trade Union on Wages V Monopsony

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Effect of Trade Union on Wages V Monopsony

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how are wages determined in labour markets, when a monopsonist and then a trade union are present?

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Minimum Wage - Crucial article from Economists

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Minimum Wage - Crucial article from Economists

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MINIMUM-WAGE laws have a long history and enduring political appeal. New Zealand pioneered the first national pay floor in 1894. America's federal minimum wage dates from 1938. Most countries now have a statutory pay floor-and the ranks are still swelling. Even Germany, one of the few big countries without, may at last introduce a national one. And in an era of budget austerity and widening inequality, the political temptation to prop up wages at the bottom by fiat may well grow.
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Economists have tended to oppose minimum wages on the grounds that they reduce employment, hurting many of those they are supposed to help. Milton Friedman called them a form of discrimination against low-skilled workers. In standard models of competitive markets, anything that artificially raises the price of labour will curb demand for it, and the first to lose their jobs will be the least-skilled workers.

Yet economic theory allows for the possibility that wage floors can boost both employment and pay. If employers have monopsony power as buyers of labour and are able to set wages, for instance, they can keep pay below its competitive rate. Academic supporters of wage floors, mainly economists on the left, appealed to this logic. But most of their colleagues disagreed; and until about 1990, most empirical studies found that higher minimum wages cost jobs, particularly among young workers.

Then a pioneering case study by two noted labour economists, David Card and Alan Krueger, examined the response of fast-food restaurants to a rise in New Jersey's state minimum wage. It found that this had actually increased employment. The paper spawned a flood of similar "case-study" research, a flurry of revisionist thinking and a heated academic debate. The most prominent critics of the new research were David Neumark of the University of California at Irvine and William Wascher of the Federal Reserve. They disputed Messrs Card and Krueger's findings for New Jersey and argued that a comparison of different states over time showed that higher minimum wages hurt jobs.

Almost two decades later, the minimum-wage debate has matured, not least because policy changes have brought heaps of new evidence to analyse. Britain introduced a national minimum wage in 1999. America's states saw numerous adjustments in their minimum wages, and the federal floor was raised by 40% between 2007 and 2009.

America's academics still do not agree on the employment effects. But both sides have honed their methods and, in some ways, the gap between them has shrunk. Messrs Card and Krueger moved on to other work, but Arindrajit Dube at the University of Massachusetts-Amherst and Michael Reich of the University of California at Berkeley have generalised the case-study approach, comparing restaurant employment across all contiguous counties with different minimum-wage levels between 1990 and 2006. They found no adverse effects on employment from a higher minimum wage. They also argue that if research showed such effects, these mostly reflected other differences between American states and had nothing to do with the minimum wage.

Messrs Neumark and Wascher still demur. They have published stacks of studies (and a book) purporting to show that minimum wages hit jobs. In a forthcoming paper they defend their methods and argue that the evidence still favours their view. But even they are no longer blanket opponents. In a 2011 paper they pointed out that a higher minimum wage along with the Earned Income Tax Credit (which tops up income for poor workers in America) boosted both employment and earnings for single women with children (though it cost less-skilled, minority men jobs).

Britain's experience offers another set of insights. The country's national minimum wage was introduced at 46% of the median wage, slightly higher than America's. A lower floor applied to young people. Both are adjusted annually on the advice of the Low Pay Commission. Before the law took effect, worries about potential damage to employment were widespread. Yet today the consensus is that Britain's minimum wage has done little or no harm.

The most striking impact of Britain's minimum wage has been on the spread of wages. Not only has it pushed up pay for the bottom 5% of workers, but it also seems to have boosted earnings further up the income scale-and thus reduced wage inequality. Wage gaps in the bottom half of Britain's pay scale have shrunk sharply since the late 1990s. A new study by a trio of British labour-market economists (including one at the Low Pay Commission) attributes much of that contraction to the minimum wage. Wage inequality fell more for women (a higher proportion of whom are on the minimum wage) than for men and the effect was most pronounced in low-wage parts of Britain.
The British way versus the American way
This new evidence leaves economists with lots of unanswered questions. What exactly is going on in labour markets if minimum wages do not hurt employment but reduce wage gaps? Are firms cutting costs by squeezing wages elsewhere? Are they improving the productivity of the lowest-wage workers? Some of the newest studies suggest firms employ a variety of strategies to deal with a higher minimum wage, from modestly raising prices to saving money from lower turnover.

Policymakers face practical issues. Bastions of orthodoxy, such as the OECD, a rich-country think-tank, and the International Monetary Fund, now assert that a moderate minimum wage probably does not do much harm and may do some good. Their definition of moderate is 30-40% of the median wage. Britain's experience suggests it might even be a bit higher. The success of the Low Pay Commission points to the importance of technocrats rather than politicians setting wage floors. Britain's small, regular changes may be easier for firms to absorb than America's infrequent but hefty minimum-wage increases. Whatever their flaws, minimum wages are here to stay.
"Minimum wage channels of adjustment", by Barry T. Hirsch, Bruce E. Kaufman and Tetyana Zelenska, IZA Discussion Paper No 6132, November 2011 "Minimum wages and wage inequality: Some theory and an application to the UK", by Tim Butcher, Richard Dickens and Alan Manning, October 2012 "Why has the British national minimum wage had little or no impact on employment?", by David Metcalf, CEP Discussion Paper No 781, April 2007 "Minimum wage: Maximum impact", by Alan Manning, Resolution Foundation, April 2012 "Revising the minimum wage-employment debate: Throwing out the baby with the bathwater?", by David Neumark, J.M. Ian Salas and William Wascher, forthcoming "Do minimum wages really reduce teen employment? Accounting for heterogeneity and selectivity in state panel data", by Sylvia A. Allegretto, Arindrajit Dube and Michael Reich, Industrial Relations, April 2011

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MINIMUM-WAGE laws have a long history and enduring political appeal. New Zealand pioneered the first national pay floor in 1894. America's federal minimum wage dates from 1938. Most countries now have a statutory pay floor-and the ranks are still swelling.

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