4.1.6.6 - The National Minimum Wage

National Minimum Wage =

The lowest wage which a worker can be employed, set by the government.

• aka National Living Wage

Trade Union and National Minimum Wage

• They have the same diagrams & same chain of analysis on competitive and monopsony labour markets

Impact of NMW on Perfectly Competitive Labour Market Chain of Analysis

• In a competitive labour market, wages were W1.

• Government sets NMW of W2 above the equilibrium wage rate

• Wages increase from W1 to W2

• But employment falls from Q1 to Qd

• As supply extends to Qs and demand contracts to Qd, there is real wage unemployment of Qs-Qd

• The labour supply curve is kinked - perfectly elastic up to Qs, but to raise labour supply beyond this, firms must offer higher wages.

Impact of NMW on Monopsony Labour Market Chain of Analysis

• In a monopsony, profit-maxing point where wages are at W1 and employment is Q1

• Government sets NMW of W2

• MC and AC is now perfectly elastic up to Q2 as hiring one extra worker up to this point costs the same wage rate.

• The profit-maximising point where MC=MRP is now at W2, Q2

• Wage has increased from W1 to W2 and employment has increased from Q1 to Q2

Evaluations of NMW Impact on Wages & Unemployment

IDO:

• Level of wage rate imposed - the greater it is above equilibrium, the lower the level of employment

• Elasticity of Supply & Demand for labour - if inelastic, effect on u/e is smaller

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Counter:

• ‘Corporate Flight’ - if NMW set too high, firms may just leave and move to other locations with lower NMW

• Combination of Policies required to reduce poverty - need to also do investment in training, reforms to welfare system

Advantages of a National Minimum Wage

Poverty alleviation:

• Ensures a fair wage, reduces wage inequality, reduces social deprivation & crime

• UK NLW = At least 67% of median hourly wages

• ‘Relative Poverty’ defined as 60% of median income

• Therefore, NLW prevents relative poverty

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Greater incentives to work:

• Earnings/poverty trap reduced as it makes taking a job more beneficial/worthwhile

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Increases productivity:

• Workers on higher wages tend to work harder

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Reduced government spending:

• on in-work benefits (universal credit)

• & on out-of-work benefits via lower earnings trap effect

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Prevents monopsonist exploitation:

• Higher wages & higher employment in monopsonist markets

Disadvantages of a National Minimum Wage

Increases unemployment in competitive labour markets:

• Employment falls from Q1 to Qd

• Real wage unemployment of Qs-Qd (from contraction along D and extension along S)

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Increases firms costs & raises prices:

• SRAS left → increase prices → less internationally competitive + products more expensive for consumers

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Increases inequality further:

• Reduces income of the workers who lose their jobs in competitive labour markets (Q1-Qd)

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Difficulty in targeting & setting the correct wage:

• Different wages in every industry

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Inflexibility:

• Firms cannot reduce wages in a recession, so have to lay off workers instead