The National Minimum Wage

Question 1

What is the national minimum wage?

Answer 1

A legally enforced price floor for wages

Question 2

What are some advantages of the national minimum wage?

Answer 2

• reduces exploitation of low paid workers
• reduces poverty (only people who have a job tho)
• increases equality
• the increase in incomes will increase AD and then lead to increases in demand for product and therefore derived demand for labour
• more opportunities for under 21s to find work experience, as firms more likely to hire them as cheaper
• creates incentives to work - increase in LRAS

Question 3

What are some limitations of the national minimum wage?

Answer 3

• only have impact when set above the equilibrium wage rate in prevailing markets
• only increases income for those in work
• contraction in demand for labour, firms may invest in capital equipment instead of workers
• could cause classical unemployment
• could cause cost push inflation
• consumers face higher prices
• makes domestic businesses less competitive in international markets, potentially worsening the BoP current account position
• same across UK, irrespective of costs of living in different areas
• may encourage age discrimination

Question 4

What does the national minimum wage depend upon?

Answer 4

• how large the increase in minimum wage is
• if there is economic growth to support the rise
• whether it will lead to an increase in productivity