4.1.6.6 The National Minimum Wage Flashcards
(14 cards)
What is the National Minimum Wage (NMW)?
A minimum price floor for labour set above market equilibrium.
Designed to protect low-wage workers and reduce exploitation.
Draw the NMW effect in a competitive labour market. Label: Original equilibrium (W₀, Q₀), NMW (Wₘ), Unemployment (Qₛ - Qᴅ)
Horizontal line at Wₘ > W₀.
Surplus labour = Qₛ (supply) > Qᴅ (demand).
How does labour demand elasticity affect NMW impact?
Elastic demand: Large employment fall (Q₁→Q₃).
Inelastic demand: Small employment fall (Q₁→Q₂).
UK evidence: No significant job loss (NMW still low relative to productivity).
List 3 advantages of the NMW.
Reduces poverty: Raises living standards for lowest-paid.
Incentivizes work: Better than welfare for some.
Boosts tax revenue: Higher wages → more income tax/NICs.
List 3 disadvantages of the NMW.
Youth unemployment: Firms may hire fewer inexperienced workers.
Global competitiveness: Higher wages → higher production costs.
Potential job losses: If set too high (depends on elasticity).
Why has the UK NMW not caused significant unemployment?
Set at moderate level (below marginal productivity for most jobs).
Monopsony power: NMW counters employer wage suppression.
Productivity gains: Firms offset costs via efficiency.
How does the NMW differ from a ‘Living Wage’?
NMW: Legal minimum (government-set).
Living Wage: Voluntary, higher rate (covers basic living costs).
How does NMW affect monopsony labour markets?
Can increase employment: Forces wage toward competitive level (Wₘ → W₁).
Counters exploitation (monopsony pays W₂ < competitive wage).
Is the NMW always effective?
Yes: If set at optimal level (e.g., UK).
No: If too high (e.g., Spain’s high youth unemployment).
Depends on labour demand elasticity and market structure.
Why might NMW harm competitiveness?
Higher labour costs → firms may:
Relocate to low-wage countries.
Automate jobs (e.g., self-checkouts).
Show NMW correcting monopsony exploitation.
Set NMW at W₁ (competitive wage) → employment rises from Q₂ to Q₁.
Give an example of NMW impact on a specific group.
Young workers: Higher NMW → fewer apprenticeships (firms prefer experienced workers).
How can governments mitigate NMW downsides?
Training subsidies: Offset youth unemployment.
Export support: Help firms stay competitive.
Gradual increases: Allow adjustment time.
