‘Minimum wage is a basic government-imposed price control. Price controls set a floor indicating what minimum price must be paid for certain goods or services. Governments set price controls to ensure individuals receive a fair wage at various jobs.’ (Osmond Vitez, 2016) To receive the national minimum wage, workers must at least be of the age to leave school and they must be at least 25 or over to receive the National Living Wage on top.
Since October 2015 minimum wage has increased by 25p for over 21 year olds, but this has now been capped to the age of 24 and a new ‘living wage’ category was introduced in April 2016 for 25 and over, with a minimum wage of £7.20. In October 2016 the minimum wage also increased by 25p for 18-20 year olds, by 13p for under 18’s and by 10p for apprentices. The purpose of a minimum wage in the long run is to remove the issue of poverty pay, which exists when the earnings from paid work do not result in a living wage and fail to move people out of poverty. Furthermore, a minimum wage also ensures a basic quality of life and governments can control the rate to ensure companies pay individuals equally (no matter of sex, gender or race etc.).
Therefore an increase in the minimum wage would see a decrease in the demand for labour and a decrease would lead to an increase in the demand of labour. (‘Figure 2’) shows that at W1 there is a lower demand for labour due to the minimum wage, but at W2, the demand for labour increases due to the National Minimum Wage (NMW) being lowered/ removed. This means that if the minimum wage rate is higher than there are more individuals willing to work, whereas if the minimum wage drops, there is less incentive to work which results in the demand of labour becoming much lower. At W1 the supply of labour is also higher because people want to be earning the NMW and this leads to the supply being lower at W2, since the minimum wage rate has either been cut or removed, resulting in less individuals wanting to work. Productivity would potentially increase as the minimum wage increases and would be at its optimal best where the demand is higher for labour and supply is lower, this is because it means that all of the highly qualified workers will obtain jobs and it also means that workers would become more motivated due to a higher income, which would increase their standard of living. In comparison, if the minimum wage decreased in October 2016 then it could lead to workers becoming less motivated and the quality of work being affected which would inflict the sales of firms. Therefore, an increase in the minimum wage from £6.70 – £6.95 for 21-24 year olds would produce a concentrate in demand at Q1, but the supply would extent to Q2, this means that more low skilled workers would actively be seeking work and it would create an unemployment from Q1-Q2, since the supply of workers exceeds the demand.
One effect of the minimum wage is that is enables the substitution effect to be reduced by having a minimum wage rate which stays fixed. The substitution effect is where firms paying higher wages will look to substitute workers for capital or other means. This is because higher rates mean firms have higher costs and this could impact their net profit margins, so therefore they look for ways to cut costs. The minimum wage also leads to demand for labour being more inelastic.
The law of diminishing returns must be considered when looking at how the demand of labour varies inversely with wage rates. An increase in the minimum wage means that individual firms can be analysed to see the number of workers profit maximisation firms employ. They will employ workers up to the point where Marginal Revenue (MR) = Marginal Cost (MC), at this point the firm will then have its optimal position for output, and if MR is higher than MC then output will be increased, whereas if MC is higher than MR, then output will be decreased.
Furthermore, in a labour market which has perfect competition there will be a wage rate determined in the industry rather than individual firms and this means that the firms become wage takers, which leads to the equilibrium wage being formed in the market and the rate of elasticity for supply of labour becomes elastic to the market rate. (Figures 3 & 4). The supply of labour can vary based on factors that change such as the qualifications required for the job, the length of training, because a short process will mean that more employees can start in a much shorter time frame and it will also save firms time and money, both of which can then be focused on the businesses main purpose. However, demand factors can also change based on circumstances such as the productivity of labour, and the demand for products/services. The monopolistic market is most likely to be impacted by the increase in the minimum wage, this is because more workers will be looking for employment and there will be a rise in disposable income, resulting in increased sales for both inferior and normal goods. This therefore means that in a market with several firms, there will be means for increasing production to meet demand this involves expanding the workforce and it provides the opportunity for firms to increase their maximum profit margins, this can be achieved when π=TR-TC. The minimum wage will also mean that firms with 25% or more being a monopoly will have more control over consumer spending by being able to set prices where there are little substitutes due to less competition in the market.
An advantage from the increase in the minimum wage is that it provides employment incentives, this means that workers are receiving better pay and therefore the standard of living for these individuals and families is improving. It also means that workers may be more motivated and this can lead to higher productivity for firms. The productivity of workers will go up and down on the curve depending on what the wage rate is. (Root III, 2016) However, it can be argued that unemployment levels will rise with an increase in the minimum wage, because it means that the less skilled workforce are unable to find employment and that the poverty levels remain the same as before. (Gillikin, 2016)
Another advantage that the UK would benefit from with the October 2016 minimum wage increase is that it reduces the amount of worker exploitation by labour market monopsonists, where a single employer is able to pay below the labour market equilibrium. On the other hand, a high minimum wage can cause price inflation, as firms cover the higher wage costs with higher prices for consumers. The UK’s minimum wage is ranked 8th in the OECD for hourly minimum wage, with Luxembourg ranked number one, having a minimum wage of £8.62. (Figure 5) This means that the UK could be at risk with high inflation rates, depending on how the firms respond to the change. However, in comparison to countries such as Mexico and Chile (Figure 6), the UK’s minimum wage is much higher and this enables the UK to have better standards of living, which means more consumers will be able to spend and it can lead to tax revenue being used to improve the infrastructure, which then leads to the UK becoming an attractive market for MNC’s and it can also lead to foreign workers moving abroad to benefit from the minimum wage rate which may be higher than their country.