Topic 4.1 - Individuals, firms, markets and market failure
Snapshot of the AQA syllabus topic area we’ll be covering in this post.
THE NATIONAL MINIMUM WAGE: THE LABOUR MARKET
AQA students must understand the following content [taken from the syllabus]
The effects of a national minimum wage upon labour markets.
The advantages and disadvantages of a national minimum wage.
ESSENTIAL INFORMATION
[NOTE: supplementary knowledge, supporting diagrams and questions at the end]
INTRODUCTION
In the previous post, we discussed how trade unions affect labour markets and how they can correct or create labour market failure. In this post we are discussing labour markets and labour market failure in relation to the national minimum wage - a form of government intervention to create a minimum acceptable wage rate.
The introduction of a national minimum wage seeks to uphold workers' rights, increase pay, and combat income inequality. It establishes a minimum hourly rate that employers are required to pay their staff as a matter of law. While advocates claim that a national minimum wage can improve labour markets, there are equally genuine questions about its benefits and drawbacks. This page will investigate the impact of a national minimum wage and look at its advantages and disadvantages.
ADVANTAGES AND DISADVANTAGES OF NATIONAL MINIMUM WAGE
Advantages of a National Minimum Wage:
Improved Livelihoods and Reduced Poverty: The implementation of a national minimum wage can raise low-paid workers' standards of living and help to combat poverty. It gives workers the means to cover their fundamental necessities, such as housing, food, and healthcare, by guaranteeing a minimum level of income.
Reduced Income Inequality: To close the income gap between high and low earnings is one of the main goals of a national minimum wage. A minimum wage is set in order to reduce income inequality and advance a more fair allocation of resources.
Enhanced Worker Productivity and Retention: Fair pay can incentivise workers to supply their labour, resulting in improved labour output and productivity, lower the turnover of labour within jobs, and increase job satisfaction. When workers are paid fairly, they are more likely to be dedicated to their roles, which raises productivity levels across the board in the labour market.
Stimulated Consumer Spending and Economic Growth: A national minimum wage can enhance consumer spending by giving low-income workers more purchasing power. This therefore increases demand for products and services, causing an increase in economic output, the creation of new job roles, especially in industries that depend on domestic consumption.
Disadvantages of a National Minimum Wage:
Potential Job Losses and Reduced Hiring: Critics (especially free market economists) say that a national minimum wage could result in job losses, especially in sectors with slim profit margins or those that depend significantly on low-skilled labour. Some businesses might not be able to afford greater labour costs, which would force them to decrease the rate at which they hire new employees, or possibly even lay off employees altogether.
Increased Cost of Business Operations: Following a national minimum wage standard may result in large increases in operational costs for firms. Particularly small enterprises may struggle to adapt to rising wage standards, which could have an effect on their viability and survival.
Potential Negative Impact on Small Businesses: Smaller businesses with fewer resources may experience more challenges in adhering to a national minimum wage. They might find it difficult to compete with bigger businesses that have more financial wiggle room and negotiating power over prices - this could increase the risk of business failure and decrease competitiveness within markets.
Inflationary Pressures: The implementation of a national minimum wage may increase pressures for inflation in a given country - greater salaries may cause firms to incur greater production expenses, which might then be passed on to customers as higher prices for goods and services.
Conclusion:
Complex factors and trade-offs must be made in order to adopt a national minimum wage. Concerns including job losses, higher business costs, and inflationary pressures must be addressed despite the fact that it can improve people' livelihoods, reduce income inequality, and spur economic growth. Before enacting a national minimum wage, policymakers must carefully evaluate the state of the local labour market, the dynamics of small businesses, and any potential long-term consequences. Promoting sustainable economic growth and ensuring the well-being of both workers and businesses depend on striking a balance between fair salaries and the general health of labour markets.
SUPPLEMENTARY KNOWLEDGE
You should also understand:
there is a difference between the national minimum wage and the national living wage
critics argue that the minimum wage rate in the UK is below the living wage
the living wage is the wage somebody needs to support a minimum acceptable standard of living
the living wage is calculated by the living wage foundation
“As of April 2023, the NLW is £10.42 per hour for those aged 23 and over, £10.18 for those aged 21–22, £7.49 for ages 18–20, £5.28 for under-18s, and £5.28 for apprentices. The London living wage is currently set at £11.95.”
information on national living wage from https://www.standard.co.uk/news/uk/national-living-minimum-wage-jeremy-hunt-budget-april-london-b1040136.html
table of national minimum wages taken from the following source:
https://www.gov.uk/government/publications/the-national-minimum-wage-in-2023/the-national-minimum-wage-in-2023
despite adopting the national minimum wage in the Uk, there is little evidence to suggest it has specifically created unemployment
though this could because the majority of employers are making supernormal profits and have the budgets to meet national minimum wage rates
also, don’t forget that the minimum wage is below the living wage - it is unlikely that firms will get away with paying far lower wages than the living wage anyway
SUPPORTING DIAGRAMS
diagram to show how national minimum wages (NMW) creates additional unemployment - the NMW increases the market wage above the equilibrium level - this creates an additional supply of labour relative to demand - this creates unemployment between Qd and Qs
note if labour demand and supply are inelastic, then the national minimum wage has less of an impact and creates less unemployment
SUPPORTING QUESTIONS
Question 1: What is the purpose of implementing a national minimum wage?
Answer:
To create a legal wage floor on the hourly wages, the government must impose a national minimum wage. It attempts to defend workers' rights, increase wages to a fairer level, lessen economic inequality, and raise low-wage workers' standards of living. It’s particularly important to have in industries where there are large monopsony employers.
Question 2: What are some potential drawbacks of a national minimum wage?
Answer:
The risk of job losses is one of the potential negatives of a national minimum wage, particularly in sectors with slim profit margins or those dependent on low-skilled labour. This is especially the case for small businesses, as it might raise operating costs. Additionally, there might be inflationary pressures and significant harm to the competitiveness of small enterprises.
Question 3: How does a national minimum wage impact the economy?
Answer:
The economy may be impacted by a national minimum wage in both positive and negative ways. On the plus side, it can increase consumer spending as lower-income households earn higher wages. It can boost employee retention rates as employees are less likely to seek higher paid work. It can boost productivity, and lessen income inequality.
However, it might also result in employment losses if the minimum wage is set too high. It can raise corporate expenses, and possibly even create inflationary pressures if firms choose to pass on increased costs to their customers via prices. To minimise any negative consequences and encourage sustainable economic growth, it is critical to evaluate the state of the local labour market and put suitable regulations in place.