A low wage economy can be defined as a can be defined as a economy where there are a high number of jobs that are of a low wage, within a range of employment incomes. A low wage can be defined as a wage which is on or below the social security benefit level. In comparison a high wage economy can be defined as an economy where a large proportion of the jobs pay a wage which is of a high wage, i.e. a wage which is a high level above the minimum social security level.
The are good arguments for Britain to be a low paid and a high paid economy, the basis of the high paid economy is basically that extra money produces more money and this brings about a buoyant economy.
A high wage economy results in high levels of personal disposable income, this disposable income and high wages is a reward for personal effects in the job. Because there is extra disposable income in the economy this results in a number of things, there is a high level of aggregate demand , as there is high demand. Because of the extra demand in the market business profits are boosted. This can be seen in the demand and supply diagram below. As there is an increase in demand the demand curve shifts from d1 to d2 this results in the equilibrium price moving from op1 to op2 which means that businesses make higher profits.
As the market has high sales and buoyant profit this results in firms having a positive outlook in the economy and this stimulates economic expansion and promotes growth in firms, firms will need to continue to grow because as there is an increase I disposable in come wages continue to rise they will need to increase the size of there business in the long run other wise they can only produce up to a point and then the law of diminishing returns will set in, and this will result in the business not maximising its profits so the business has to grow.
High wages should in theory result in full employment of the work force, this in turn brings about some big affects for the government. The government gains a lot from a high wage economy. A high wage economy means increased spending which results in larger VAT receipts for the government as people are earning higher wages this also results in higher income tax results. As the government has more money in the treasurer this results in a better social welfare structure for the country as a whole, and as there is full employment the social welfare bill is cheaper as jobseekers allowance doesn’t have to be paid. So a high wage economy results in a better health care system and a better public services for all.
A high wage economy has a profound effect on the way that business think about the way that they use labour. As labour is high cost businesses need to seek business efficiency so they can keep there profit margins up this alongside business innovation to make sure that even if labour cost are high other costs are kept low. This can be achieved through better production technique improvements in product design and rationalisation. Businesses must also strive to seek ‘capital substitution of labour’
There are however disadvantages of a high wage economy these basically are revolve around the fundamental point that labour is expensive. The entrepreneur may be forced to use less labour as labour is so expensive this can be achieved by specialisation and division of labour we may also see modern technology in the way of robots and computers being used to replace human resources. If this happens this can result in a rise in UK Unemployment and this then counters some of the benefits of high wage, i.e. a low social security bill.
In a high wage economy one of the must fundamental problems is that of inflation. In order for economies to grow and prosper inflation must be kept under control. A high wage economy results in wage cost push inflation where as wages increases prices of goods also rise, this results in high inflation and then bigger rises in wages to give a real wage increase as inflation needs to be taken into account when working out a wage rise
Demand pull inflation is also another problem of a high wage economy, as there is a high demand for must goods this results in a demand pull because s demand continues to increase the price is forced up this can be seen in the demand curve earlier in the essay.
As there are high wages UK goods and services become less competitive, this results in a number of problems. The first is that the number of UK exports fall as exports fall this results in a balance of payments deficit this isn’t helped because as there are high wages and goods are high cost the UK is open to cheaper imports from low wage economies .
If the UK is to be a high wage economy and wishes to compete effectively at the same time with the low wage economies of the, far east, Africa and even eastern Europe it must The way that the UK must compete is through better efficiency it must embrace modern technology and increase specialisation and labour division it must look to the internet for growth and only innovation can it hope to compete with low wage economies.
In Britain we currently have a mixed wage economy with both low wages and high wages in jobs. However in recent years There has been an influx in the number of low wage jobs, those are jobs that re on the same level or just above the social security benefit level.
There are many advantages to a low wage economy. The main advantage has to be it is of a big benefit to whole economy as it helps to keep both demand pull inflation down and wage cost inflation under control. The reason that a low wage economy keeps demand pull inflation down is that people have less disposable income which means they can’t demand as many goods. This means that prices aren’t increased, as there isn’t high demands for goods. In some cases it can result in the cost of goods being brought down this can be seen in the demand curve below because nobody demands the good the curve shifts to the left which results in a fall in the equilibrium price form op1 to op2.
Because there are low paid jobs this helps the entrepreneur keep down the cost of production and this results in higher profit for the entrepreneur. As production costs are kept low this makes British exports very competitive this means that there is no trade deficit and that British goods perform well overseas. There is good evidence to support this if you look at the low wage tiger economies of the Far East there exports do really well.
As well as exporting many goods we will cut down on imports, this will improve the economy on the whole and help us not to produce a trade deficit, we will be cutting down on import penetration form foreign countries and will help the economy support itself.
If labour costs are low this results in a number of things which really help entrepreneurs and the economy as a whole. If there are low wages this will reduce wage expectations on the whole, which will result in a more mobile workforce. As labour is low paid this will produces a more flexible workforce as they will need to adapt to keep earning wages. A flexible workforce is a key government aim when dealing with jobs.
The finally advantage of the UK being a low wage economy is to do with expansion of businesses, the first of these advantages is pretty simple and that I s if the entrepreneur is saving on labour he can afford to spend money on expansion. The second way in which low wages help expansion is that they encourage a flexible labour market that in turn encourages inward investment especially through multinational companies. The reason that this is special for multi national companies is that they can then use the UK as a vital stepping stone into the lucrative and wealth market of the EU.
As well as there being many advantages to a low wage economy, there are many disadvantages to a low wage economy. The basic problem is written in the name of the economy and that is that it gives out low wages which brings about lower capita per head and lower levels of disposable income.
As there is less disposable income and there are many low paid jobs this brings about a big effect on the way the social services work. Social welfare could fall as it would seem that it is acceptable for this to be below a low wage, it may also means that some families fall into the poverty trap, i.e. they are earning less money than if they were on benefit. This means that the government may have to spend more money by supplementing incomes through such schemes as the family income supplement. This then has a n effect on fiscal policy as this scheme has to be funded by the tax payer.
If individuals have less disposable income through low wages this results I a lower demand for consumer goods, if demand is really low this could result in a low amount of economic growth for the country.
The final problem with a low wage market is that firms may and probably will try to increase their profits in the short term. They can do this by becoming less capital intensive and more labour intensive, this will help to increases profits in the short run but may result in a loss of profits in the long run as the businesses doesn’t strive to become more efficient and invest in new technology.
Britain is a mixed wage economy it is neither high wage nor low wage there are however big advantage and disadvantages of both. For its size Britain is quite amazing, it is one of the world leaders when it comes to industry and is possibly the money centre of the world. The way forward for Britain is to keep the delicate balance between low wages and high wages, it is from this delicate balance that Britain manages to extract both the advantages and disadvantages of each type of wage economy. Through the embracement of new technologies we can continue to keep efficiency high along with wages. The Internet will be a powerful tool in helping firms to communicate and improve efficiency. Whilst keeping high wage jobs we need to make sure that not all low wage jobs are wiped out as it is these that help to keep inflation under control.