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Benefits and Drawbacks of a National Minimum Wage


Discuss the view that a national minimum wage is beneficial for an economy. [25 marks]


Labor Market and Income Distribution


Preview Answer

🠊 Step 1: Define 'national minimum wage' in the introduction

Is a national minimum wage beneficial to an economy? There has been fierce debate around the topic. A national minimum wage is the lowest level of pay that is legally allowable. In this essay, we will discuss whether the overall impact of a national minimum wage on an economy is beneficial. In order to make a more in-depth analysis, we will take the UK economy as an example.

Before diving into the economic impacts of the national minimum wage(NMW), it is important to distinguish it from the National living wage. The following definitions are taken from the UK government website (GOV.UK):

1.The National Minimum Wage is the minimum pay per hour to which most workers aged 16 to 24 are entitled.

2. The National Living Wage is the legally binding hourly rate for workers aged 25 and over.

The national living was set at £8.91 an hour in April 2021 and is reviewed every year just like the National Minimum Wage.

🠊 Step 2 : Analyse how a national minimum wage works in a competitive market, and the consequent theoretical impact

Let us begin our discussion with the impact of a national minimum wage in a competitive market. We will also assess whether the outcome will be beneficial for workers.

In a competitive labour market, a government is able to secure a minimum wage above the equilibrium wage rate at Wu. This is shown in Figure 1.

Figure 1:

(Diagram available with 👑full access)

At the equilibrium wage (W) , the quantity of labour employed is L. When the government imposes a national minimum wage, the wage rate rises from W to Wu. This wage increase has several benefits to workers. They will enjoy a higher income and more purchasing power. This will also increase their incentive to work harder and improve their labour productivity.

However, there are also drawbacks of the national minimum wage to workers. In Figure 1, the national minimum wage Wu is above the equilibrium. As a result, the number of workers who are offered jobs by employers falls to Lu. At this wage the number of people who would like to work is higher, this is shown by Lc. Consequently, there is a shortfall between those who want to work and those who can actually work. This is shown in figure 1 as the difference between Lc and Lu

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