Economics Paper 1 - Pre-Exam Revision

How does minimum wage effect a monopsony labour market

A minimum wage will increase both wages and employment levels

• forces wages do increases

• marginal costs becomes constant and, meaning there are no extra costs of hiring workers. This ultimately leads to an increase in the number of workers hired, as firms are incentivised to employ more labour at the higher wage.

• Productivity may increase, as motivation would be low at uncompetitive levels, so when wages are increased, workers may be more motivated to perform better, leading to higher productivity levels.

Negatives on employment -NLW

• Possible job loss or reduced hours due to higher labor costs. Employers may substitute labor with automation or reduce hiring as a response to minimum wage increases.

• Youth will be affected due to higher entry-level wage expectations, and they won’t have experience or skills yo justify this new wage level - this could also lead to long term unemployment due to youthful individuals not having opportunity to pick up skills for jobs in the future

Negatives for firms - NLW

• Labour costs increased, meaning smaller firms will have to cut costs, reducing their overall output

• Tight budgeted firms might decide to close down or leave the market - allowing larger firms to gain more market share - reducing competition further