minimum wages

Minimum wage

A legal floor on wages, set by the government, below which workers cannot be paid.

In the UK, this is called the National Minimum Wage

Purpose of Minimum Wage

Protect low-income workers from exploitation.

Reduce poverty and inequality.

Increase incentives to work, e.g., discourage welfare dependency.

Can influence aggregate demand if workers have more income to spend.

5 main benefits of minimum wage

reduces poverty

increases productivity

increases incentive to accept job

increased investment

counterbalance effect of monopsony employers

fiscal benefits for the government

higher higher wages mean low income workers pay more income tax and National Insurance while reducing reliance UN means tested benefits

this could result in increased government revenue and decreased government spending on benefits

Increased incentive for firms to boost human capital

As labour costs rise farms have a greater incentive to improve the quality of their workforce through better training and development programmes

by investing in human capital firms can enhance employees skills and productivity and showing their heart they get the most value from their higher wage expenditures

Labour market diagram

Axes: Wage (vertical), Quantity of Labour (horizontal).

Supply of labour (S): Workers willing to work at each wage.

Demand for labour (D): Firms willing to employ at each wage.

Equilibrium wage (We): Where supply = demand.

effect of minimum wage

Set above equilibrium wage (Wm > We): legally binding.

Leads to:

Higher wage for employed workers.

Potential unemployment if firms reduce labour demand.

Labour surplus (workers seeking jobs > jobs available).

(This is your classic supply/demand diagram with a wage floor above equilibrium.)

if there is elastic demand for labour what does this mean

Minimum wage → large fall in employment.

if there is inelastic demand for labour what does this mean

Small or negligible effect on employment.

if there is elastic supply for labour what does this mean

Many willing to work → bigger labour surplus.

the desirability of a minimum wage depends on?

state of economy

labour wage elasticity

regional differences in wages

competitiveness of labour markets

evaluation points

Depends on level of minimum wage: small increases may have minimal impact; large increases may cause unemployment.

Depends on elasticity of labour demand: inelastic → employment impact low; elastic → high.

Targeting: a minimum wage helps some but may harm the most vulnerable.

Other policies: tax credits or in-work benefits may reduce poverty without risking unemployment.

Labour market discrimination

occurs when employers make decisions on wages and employment based on characteristics unrelated to productivity

downsides of labour market discrimination

1. dead weight welfare loss

discrimination leads to certain groups being under employed or receiving wages lower than their MRP which is inefficient and unfair

2. higher cost in competitive markets farms that discriminate may face higher overall costs leading to higher prices for consumers

3. social discontentment discrimination causes alienation frustration and can lead to social unrest such as strikes and protests