Policies to alleviate poverty and redistribute income: national minimum wage (NMW)

Economic Development – Poverty

1. What is Poverty?

Poverty is the condition in which individuals or households lack the resources to meet a minimum standard of living. It is usually measured in monetary terms (absolute poverty) or relative to the average income of a society (relative poverty).

2. Measuring Poverty

Common indicators include:

• Absolute poverty line – a fixed monetary threshold (e.g., $1.90 per day).
• Relative poverty line – a percentage of median household income (often 60%).
• Multidimensional Poverty Index (MPI) – combines health, education and living standards.

For a simple income‑based measure, the average income per person can be expressed as:

\$\$

\bar{y} = \frac{1}{N}\sum{i=1}^{N} yi

\$\$

where \$y_i\$ is the income of individual \$i\$ and \$N\$ is the total population.

3. Why Reduce Poverty?

Reducing poverty is a core objective of economic development because it:

1. Improves health and education outcomes.
2. Increases labour productivity and economic growth.
3. Reduces social unrest and crime.
4. Promotes a more equitable distribution of income.

4. Policy Approaches to Alleviate Poverty

Governments use a mix of direct and indirect policies, such as:

• Cash transfers and social safety nets.
• Subsidised public services (health, education).
• Progressive taxation and income redistribution.
• Employment‑oriented measures – e.g., public works programmes, training.
• National Minimum Wage (NMW) – a legally mandated floor on hourly pay.

5. National Minimum Wage (NMW)

The NMW is a policy tool that sets the lowest legal hourly wage that employers must pay workers. It is intended to raise the earnings of low‑paid workers and reduce in‑work poverty.

5.1 Objectives of an NMW

• Increase the real income of the lowest paid.
• Reduce the gap between low and median wages.
• Encourage work over reliance on welfare.
• Promote a fairer distribution of national income.

5.2 How an NMW Works

Employers must pay at least the statutory hourly rate. The rate is usually reviewed annually and may be indexed to inflation or average earnings.

5.3 Arguments in Favor of an NMW

• Poverty reduction: Directly raises earnings of the poorest workers.
• Increased consumer demand: Higher wages boost household spending, stimulating demand.
• Reduced reliance on welfare: Fewer workers need means‑tested benefits.
• Social justice: Provides a floor for a decent standard of living.

5.4 Arguments Against an NMW

• Unemployment risk: Higher labour costs may lead firms to cut jobs or reduce hours.
• Informal sector growth: Employers may shift workers to untaxed, unregulated arrangements.
• Cost pass‑through: Prices of goods and services may rise, eroding real wage gains.
• Regional disparities: A uniform national rate may be too high for low‑productivity regions.

5.5 Conditions for Effectiveness

1. Appropriate level: Set above the prevailing low wage but below the productivity threshold.
2. Enforcement mechanisms: Strong labour inspection and penalties for non‑compliance.
3. Complementary policies: Active labour market programmes, training, and support for small firms.
4. Gradual implementation: Phased increases to allow firms to adjust.

5.6 Example: United Kingdom (2024)

*Real change accounts for inflation measured by the Consumer Price Index.

5.7 Evaluation – Does the NMW Reduce Poverty?

Empirical evidence is mixed. In many high‑income countries, the NMW has lifted earnings for low‑paid workers without causing large‑scale job losses. However, in economies with large informal sectors, the impact may be limited if employers shift work out of the formal market.

Key points for evaluation:

• Magnitude of wage increase versus cost of living.
• Coverage – proportion of workers actually covered by the NMW.
• Interaction with other policies (e.g., tax credits, welfare reforms).
• Long‑run effects on productivity and skill development.

6. Summary

The national minimum wage is a direct policy instrument aimed at raising the income of the lowest paid and reducing in‑work poverty. Its success depends on setting an appropriate level, ensuring compliance, and pairing it with complementary measures that support both workers and employers.