effects of increased NMW (3)

Question 1

what are the macroeconomic effects of increased NMW in a particular industry in the UK economy

Answer 1

• cost push inflation -> production costs rise -> prices rise for consumers -> SRAS shifts inwards -> price level up -> cost-push inflation
• demand-pull inflation -> more disposable income for workers -> more consumption (60% of AD in the UK) -> AD up = real GDP up -> actual eco. growth but inflationary pressure
• income equality improvements -> higher wages -> reduces wage disparities -> workers have more disposable income -> more likely to spend on luxury goods -> Lorenz curve shifts closer to the line of equality -> fall in Gini coefficient
• higher income tax revenue -> due to higher wages -> more funds available for public expenditure e.g healthcare + education -> better living standards

Question 2

evaluate the macroeconomic effects of increased NMW in a particular industry in the UK economy

Answer 2

• higher tax revenue may not occur if unemployment increases
• if unemployment increases -> less productivty or motivation in the workforce -> increased spendig on unemployment benefits -> worsened budget deficit
• investment may fall due to less profits (due to higher wages) -> offsets rise in AD due to incr consumption

Question 3

what are the microeconomic effects of increased NMW in a particular industry in the UK economy

Answer 3

• reduced profits for produers -> UK increased NMW from £8.60->10 (18-20 year olds) -> increased variable costs -> cost/revenue diagram -> less profits -> less funds for capital investment -> less dynamic efficiency
• higher prices for consumers -> incr productio costs passed on -> reduced consumer surplus -> harms consumer welfare
• higher wages for workers -> incr disposable income for low-paid workers -> higher marginal propensity to consume -> incr spending on goods -> services -> better living standards +ve multiplier effect -> incr demand for other businesses -> incr revenue for them

Question 4

evaluate the microeconomic effects of increased NMW in a particular industry in the UK economy

Answer 4

• firms may respond to higher wages through automation to maintain profits e.g. self service -> incr unemployment -> workers may be occupationally mobile -> difficult to switch between jobs
• depends on WELD -> if wage costs are a small proportion of wage costs -> quantity demanded for labour will not chage significantly -> unemployment will not rise significantly
• if demand for the good = elastic -> consumers can switch to cheaper alternatives
• regional differences ie. London already has high costs -> NMW rise may have a small impact on demand