Minimum Wage: The lowest wage, determined by law

Diagram Analysis of a Competitive Market - Without the minimum wage, the wage rate is set at W* with employment at L* - When a minimum wage is introduced, the level of employment falls to Ld - The supply of labour increases because more people are willing to work at the higher going wage rate - This causes unemployment from Ld to Ls because the firms are not willing to pay the increased wage rate

Diagram Analysis of a Monopsony Market - Before minimum wage, the market was not working efficiently because the monopsony took advantage of its buying powers by keeping their wage rate low (£30) which made less people want to supply labour (3) - The minimum wage rate means that the firm cannot pay less than £40 for any quantity of labour which increases employment from 3 to 4 as more people are willing to work at the given wage rate

Does Minimum Wage Cause Unemployment YES - Firms need to layoff workers in order to remain competitive whilst affording the higher wage rate - The supply of labour curve is elastic for low- skilled workers who will be most affected by the introduction of a minimum wage - Firms may substitute labour with capital e.g. machines if this is a cheaper alternative - Firms may not expand if labour is too expensive for them to take on more workers so the economy as a whole won’t grow which will decrease overall employment levels (e.g. movie theatres have stopped employing ushers almost entirely. And many companies are moving toward more automation, at least partly because of minimum wage increases) - A study by Jeffrey Clemens and Michael Wither evaluated the effect of minimum wage increases on low-skilled workers during the recession and found that minimum wage increases between December 2006 and December 2012 reduced the national employment by1.4 million jobs. NO - Firms can absorb the costs or pass them on to the consumers rather than make people redundant - Increased MWR can increase productivity as workers have more incentive to work and can increase their life out of work which will make them more productive e.g. not sick - Substitution effect: with a MWR, the opportunity cost of leisure is higher such that workers may want to work more hours - Evidence that introducing a minimum wage does not cause unemployment e.g study, by David Card and Alan Krueger, compared fast food employment in New Jersey and Pennsylvania after one state increased its minimum wage and the other didn’t. They didn’t find a significant effect on employment - Government gets more revenue through tax and has to pay out less benefits so the extra money can be invested to increase training (apprenticeships) which will reduce unemployment - The Keynesian argument that higher wage rates will increase the disposable incomes of lower-paid workers many of whom have a high propensity to consume. Thus they will increase their spending and this will feed through the circular flow of income and spending - More low-skilled workers getting paid a higher wage will mean they have more money to spend (high propensity to consume if low earner) which means more money is being injected into the economy which will cause economic growth from which higher demand for labour will derive and so unemployment will fall

Minimum Wage and Youth Unemployment As the diagram shows, the % of the youth who are unemployed is higher in EU countries which have a minimum wage. This is because the minimum wage decreases firms demand for labour so they are more likely to employ older people who have more skills and experience or even machinery as young people often do low-skilled work which machines can often do more efficiently. The youth (U20) also receive a lower minimum wage which means the introduction of a minimum wage for them will provide less incentive to provide labour

Minimum wage rose by 41% between 2007 and 2009 – it had a disastrous effect on teenagers. The jobless rate for year olds increased by ten percentage points, from about 16% in 2007 to more than 26% in 2009

The Minimum Wage Effect on Productivity - It would be expected that the minimum wage would increase productivity as workers have more of an incentive to work and a higher standard of living - Firms may send their employees for training (or require higher skills) if the have to pay a higher wage for them which will increase productivity - However… - It is difficult to measure productivity especially in the service sector so we cannot be certain that the minimum wage will have a positive effect - Inertia: employers may not seek to replace less productive workers due to laziness which means employees will feel secure in their jobs such that they will not increase their productivity - Attachment between workers and employers: employers may feel loyal to their workforce which will reduce the mobility of labour and make supply more inelastic such that workers will not feel the need to increase productivity - A higher wage rate may result in an opportunity cost of firms reducing fringe benefits for low-skilled workers which may reduce their incentive to work - Some workers may be working for non-pecuniary reasons (e.g. care home workers doing it because they care about the elderly) which means their productivity will not increase due to a minimum wage

The Political Debate Conservative - Osbourne introduced the ‘Living Wage’ in his first budget of 2015: The National Living Wage, starting at £7.20 and rising to £9 an hour by 2020, replaces the £6.50 minimum wage - Increasing the minimum wage to incentivise more people to work but opportunity cost of cutting benefits (6.5 million people’s benefits cut) Labour - Labour introduced the minimum wage in 1999 (£3.60 per hour for adult workers over the age of 22 and £3.00 for those aged 18-22) - Partially introduced because of decline of trade union membership over recent decades as well as a recognition that the employees most vulnerable to low pay were rarely unionised in the first place - Today Labour want to increase the National Minimum Wage to £8 an hour by 2020 and promote the living wage