6.6 National Minimum Wage

national minimum wage

a legally mandated lower bound wage tthat employers must pay their workers

statistic on NMW/NLW

Increased this April from £11.44 an hour to £12.21 an hour for over 21 year olds

what is the diference between national minimum wage and national living wage

NLW is for 21 and over

NMW if for under 21s and apprentices

what is the real living wage rate

a wage rate calculated by an independent body based on living costs

£12.60

London living wage rate

£13.85 - accounts for higher costs of living in london

how many businesses pay real living wage

over 15,000 Uk businesses including half of FTSE 100

what is the “bite“ of NMW

how close the NMW is relative to average wages

usuall a %, the higher the % the closer NMW is to the average wage

why does the bite matter

bite determines how many workers are affected and how strong the impact of the NMW

impact of NMW on monopsony labour market

In a monopsony, firm under-hires and workeres are underpaid

setting a NMW between the monopsony wage and the competitive wage

increases employment and increases wage

use diagramatic analysis

evaluation of NMW on monopsony labour market

trade unions could be more effective - this depends on thier power, govt regulation and TUD

impact on the firm is negative

wage is still lower than the value workers add

govt need to correcly set the level

analysis of NMW in a competitive market

NMW is set above the equilibrium wage

higher wages → lower in work poverty → incentives improve → more people want to work → extension in supply

firms ration their demand → contraction in demand

market distortion → labour market doesn’t clear → excess supply and demand shortages → misallocation of resources

real wage unemployment

evaluation of NMW in a competitive market

Unemployment levels are higher if S&D are inelastic → often minimum wage jobs are highly elastic eg retail worker or cleaner → worsening inequality + relative poverty but less in-work poverty

firms may experience productivity boosts → shifts demand for labour → reduces unemployment

Instead of firing, firms may cut non-monetary benefits, hold off on promotions or reduce hours

in the short run → unemployment may not increase → labour market rigidity doe to complex regulation eg hiring and firing procedures

arguments for NMW

Prevents exploitation of workers

reduces in work poverty

boosts motivation amongst workers → boosts productivity → MRP increases → ofsets higher wage

monopsony → increases employment

arguments against NMW

real wage unemployment

unemployment may be concentrated amongst low-skilled workers from disadvantaged backgrounds → worsening inequality and relative poverty

risk of government failure → setting incorrect NMW, excess unemployment as an unintended consequence, administrative costs and costs of prosecution

cost-push inflation → regressive + impact on international competitiveness

case study on minimum wages and employment

the Fast Food Industry in New Jersey and Pennsylvania

case study description

Compared employment rates in the fast food industry between Pennsylvania and New Jersey after the state minimum wage in New Jersey increased, and found that employment levels increased, contradicting the classical theory

reasons for employment in new jersey increasing

cost pass through to prices

improved worker moral, productivity

lower turnover and less absenteeism

demand for labour may be inelastic in the short run

evaluation of case study

only for fast food industry and short term analysis

what does the impact of NMW depend on

the bite of the NMW

the proportion of the population recieving NMW

the type of labour market (competeive or monopsony)

the labour cost share

PED and PES

Why might unemployment from a NMW be concentrated among low-skilled workers or workers from disadvantaged backgrounds

low skilled/inexperienced workers have a lower MRP

disadvantaged workers eg ethnic monority have a lower percieved MRP

firms only hire workers when MRP > wage

These groups are often first to be priced out when minimum wages rise

long term impacts → low paid jobs act as stepping stones into the labour market → fewer people from disadvantaged backgrounds get the vital first job → worsens long term inequality