6.6 The National Minimum Wage

Question 1

What is the national minimum wage?

Answer 1

• A minimum wage is a legally-enforced pay floor in the labour market, designed to protect as many low-paid workers as possible without hurting jobs or the economy.
• The National Minimum Wage is an example of a minimum price.
• The minimum wage has to be set above the free market price, just like other
  minimum prices, otherwise it would be ineffective.

Question 2

What are some advantages of the national minimum wage?

Answer 2

• There has been no evidence of a rise in unemployment with a rise in the NMW so far in the UK-some firms say this is because the NMW is still relatively low.
• The NMW will yield the positive externalities of a decent wage, which will increase the standard of living of the poorest, and provide an incentive for people to work. (poverty alleviation)
• Reduce wage differentials
• The government might make more tax revenue, due to more people earning higher wages and spending less on welfare payments (fiscal benefits)
• Provides incentives to work-reduces voluntary unemployment
• Increased productivity due to increased worker morale
• Incentive for firms to boost human capital
• Counter monopsonist employer

Question 3

What are some disadvantages of the NWM?

Answer 3

• It could make it harder for young people to find a job, because their lack of experience might not be valuable to firms who are paying more for their labour–>lower MRP
• A higher wage could make the country less competitive on a global scale, since they cannot compete with countries that have lower wages.
• Real wage unemployment may be caused as demand does not match supply (on diagram)
• Regional differences in NMW