In this essay I will provide explanations and evaluate why
the government should and shouldn’t intervene to increase the disposable income
of personnel whom collect a low annual wage. Disposable
income, also known as disposable personal income, is the quantity of money that
households have accessible for spending or saving after income taxes, national
insurance and other payments have been deducted. (Investopedia 2017) Disposable
personal income is frequently observed as a factor of the various central
economic indicators utilised to measure the overall state of the economy. It is
the most efficient assessment we can make use of to observe how deviations in
annual household income influence consumption. The government can intervene to
raise the income in many ways, through increasing the minimum wage policy,
reducing the tax on the poor and increasing benefits.
The central most imperative tool in the government
increasing wages would be the minimum wage policy, increasing minimum wages
would directly increase the disposable income of workers on low pay. The
government intervening to increase low paid workers has several benefits; it
reduces inequality within society, higher wages may encourage greater
productivity as more people are more motivated , increases incentives for
unemployed to seek employment , reduces dependence on benefits and the
government can counter monopsony power amongst employers , I will evidently
explain all these within the following essay and assess the case for the
government intervening to raise the disposable income of workers. On the other hand,
there are countless issues and arguments against the government intervening to
raise the disposable income of workers a few of them being; higher wages cause
unemployment in competitive markets, higher wages discourage firms from
investing in the UK, government regulation can be costly, and a poverty trap
may be created by higher taxes and benefits that may also reduce incentives to
The first reason for raising the income of workers on low pay,
is to diminish relative poverty, which reflects inequality within society. This
inequality derives from unbalanced opportunities like high earning/middle class
parents being able to have the financial resources to send their children to
private school in or to receive a higher level of education which results in a
higher annual salary for the future, this could be a future cycle that gets
relayed down from generation to generation.(Sloman J 2015) Thus, increasing
incomes of the low earning the government is helping to reduce inequality.
Diminishing inequality also has some real-world economic disputes, along
with ethical validations. Income inequality might exaggerate feelings of
hostility within society; which in result may cause issues like; crime,
vandalism and strain within society.
Low pay workers income being increased could generate a
larger incentive for low paid workers to migrate from benefits to paid work, it
reduces their dependability on benefits and enables individuals to earn a wage
they would benefit from, the current minimum wage in the UK is £7.50 for those
over 25 (Government services 2017) and the current economic growth within the
UK seems to be growing exponentially. If wages remain low, personnel are
stimulated to stay persistent on benefits from unemployment and income support.
(Pettinger 2017) Overtime an increase in wages for low workers may salvage the
government from reimbursing benefits and condensing the poverty trap. However
Increasing Benefits could also increase the disposable income of workers on low
pay as it accumulates to an individual’s post tax income, which amounts towards
there disposable income. Income of workers on low pay are usually legally
entitled to receive government benefits such as housing benefits and cheaper
prescriptions that would aid them in getting a higher quality of life and being
able to survive by adding to their annual income.
The disposable income of workers in areas such as Scotland
is greater than that of personnel who are based in London since living costs
are a lot higher because of rent and tenant expenses, based on a report written
by resolution foundation it discloses employees north of the border are
distinctively grossing more than their southern counterparts. (Brooks L 2016)
This subsequently lead to the living standard in the north/ Scotland being
greater and growing faster than in the south.
The overall minimum pay in Scotland is still below national
average threshold with one in 5 earning below the national threshold, but the
low housing costs in Scotland and high housing cost in London, subsidises the
below par national minimum wage in Scotland and therefore contributes to the
disposable income of workers in Scotland being greater than that of London.
(Brooks L 2016) This also indicates that minimum wage is not the only
contributor/one of the ways to intervene to raise the disposable income of workers,
but environmental and location factors also have a role.
Higher annual wages build up the practicality and
enthusiasm of workers, along with bringing loyalty to a firm due to the
financial incentive being provided, as raising the level of pay for low paid
workers is proven to have a positive influence on their level of output; this
is the efficiency wage theory. The
Keynesian theorists argue that better wage rates will increase the disposable
income of low paid workers, of which a large proportion have a high propensity
to consume. Therefore, they will increase their spending which in turn will
operate through their circular flow of income and spending.
The reason for some
personnel receiving low pay could be because of monopolistic employers that
manipulate their monopoly power to reimburse lower wages than market forces.
(Pettinger 2010) Consequently the government can counter monopsony power
amongst employers, if the government increase wages through the minimum wage
policy then unemployment will not occur.
More over reducing the taxes on poor is a
method to increase the disposable income of low paid workers indirectly, this
would ensure that the lower paid workers usually the working class are taxed
less (fall into a lower tax bracket) and therefore they have more money in
terms of savings consequently raising disposable income of workers. (Serafino
et al 2017) The average tax bill for low paid workers in the year ending 2016
was around £7,600 in direct taxes this is equal to 18.7% of their gross annual
income, eliminating income tax on the low paid would ensure that low paid
workers are able to invest and inject their disposable income back into the economy,
by increasing spending. (Serafino et al 2017) Eliminating income tax would be a
more effective anti-poverty strategy as it would increase living standards, and
it would stop firms from divesting as they would not be affected by the
elimination of income tax directly, Consequently, this would result in a
greater disposable income of workers on low pay.
This graph includes the regression trend to reflect the
general optimistic relationship between the level of minimum wage and the
financial welfare (percentage of the population economically thriving) of
individuals in many different nations across the globe. The graph modestly
shows that as the level of minimum wage increases the economic welfare of the
population also increases.
There are many reasons against the government
intervening to raise the disposable income of workers on low pay, one of them
being that a higher minimum wage kills of jobs as firms are legally entailed to
pay their employees a higher minimum wage they must compensate this by making
employees redundant to keep the same wage bill on there balance sheet. If
businesses did not get rid of employees, they would generate a lower rate of
annual revenue therefore lower profit.
Because of this companies counteract by
making the number of employees smaller, this supports the argument that an
increase in minimum wage essentially leads to a greater disposable income and
this may cause unemployment in competitive markets. This directs us to the
point that higher wages discourage firms from investing in the UK.
Higher national wages may discourage firms from
investing within the UK as they may not be able to afford the wages, this
forces firms to protect their revenue streams and relocate there headquarters
else where along with relocating their offices in countries where the minimum
wage is significantly lower, therefore they do not need to pay employees the
higher minimum wage that is required and in the long run the firm has a greater
Increasing the national minimum wage may not
always reduce inequality, research shows that households in the middle class
have the biggest advantage from an increase in minimum wages, whereas
households in the bottom half/working class only attain 45% of the total
benefits of higher minimum wage after tax and benefits have been deducted.
(Equality trust 2015)