Evaluate the likely microeconomics effects of an increase in the UK national minimum wage

Question 1

KAA1 - effect on producers

Answer 1

A higher national minimum wage (e.g., the 2024 rise from £10.42 to £11.44) increases firms’ wage bills → Especially impacts labour-intensive sectors (hospitality, retail, care) → Firms experience higher marginal costs → Profit margins shrink → They may respond by raising prices (cost-push inflation), cutting jobs, or reducing investment.

Chain of reasoning (→ arrows):
Minimum wage ↑ → Labour costs ↑ → Marginal cost of production ↑ → Profit margins ↓ → Firms cut investment or raise prices (LOSS OF CONSUMER WELFARE)→ Risk of lower competitiveness and higher unemployment.

LABOUR INTENSIVE INDUSTRIES LIKE CONSTRUCTION HIGHLY AFFECTED (THEY HAVE MANY APPRENTICES ON NMW)

Small street businesses heavily affected as they rely heavily on minimum wage workers

Less investment into R and D-Reduction in dynamic efficiency

✅ Stakeholder Effects:

Firms (Producers): Higher costs, lower profits.

Consumers: Face higher prices if costs are passed on.

Government: Potential increase in unemployment benefit claims if firms cut jobs.

✅ Real-life Application:

British Retail Consortium (2023) warned that small businesses (independent shops, cafés) were most vulnerable to minimum wage hikes, risking closure or automation.

Tesco and Amazon have increasingly shifted to self-checkouts and warehouse automation to control labour costs.

📈 Diagram Suggestion:

Labour Market Diagram:

Show minimum wage set above equilibrium → Labour demand contracts → Potential unemployment (excess supply of labour).

COSTS AND REVENUE DIAGRAM (SHIFT IN MC AND AC)

Question 2

Eval1

Answer 2

Some firms face inelastic demand for their products → Consumers will continue to buy even if prices rise slightly → Therefore, they can absorb higher wages with little impact on profits or jobs.

Higher wages can boost worker productivity (Efficiency Wage Theory) → Lower turnover and absenteeism → Partly offset higher costs.

✅ Real-life Application:

Aldi and Lidl maintained strong employment growth after the 2016 National Living Wage introduction despite higher wages.

✅ Stakeholder Focus (Evaluation 1):

Large firms with pricing power (e.g., supermarkets) may be less harmed than theory suggests.

Question 3

KAA2 - IMPACT ON WORKERS

Answer 3

A higher minimum wage raises the income of low-paid workers → Directly improves their ability to meet basic needs (e.g., food, housing, energy) → Reduces individual material deprivation → Helps close the gap between low and average earners →Reduction in price discrimination- Improves individual living standards and microeconomic welfare.
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Chain of reasoning (→ arrows):
Minimum wage ↑ → Worker disposable income ↑ → Ability to afford essentials ↑ → Individual living standards ↑ → Microeconomic welfare improves.

HIGHER MRPL-HIGHER EMPLOYMENT
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✅ Stakeholder Focus:
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Workers (especially low-paid workers, part-time workers, carers, cleaners, hospitality staff) benefit directly.
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✅ Real-life Application:
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The Resolution Foundation (2024) found the 2024 minimum wage increase (£11.44/hour) will lift thousands of workers out of low pay thresholds, especially in retail and social care.
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📈 Diagram:
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Labour market diagram: Wage floor above equilibrium, showing higher wages for those employed.

Question 4

Eval2

Answer 4

Not all low-paid workers benefit equally:

Some workers may already be earning just above the old minimum wage and get no direct pay rise → They feel relatively worse off (“pay compression”) compared to those whose wages increased → Worker resentment and reduced morale among near-minimum wage earners.

Chain of reasoning (→ arrows):
Minimum wage ↑ → Some low-paid workers’ wages frozen (if already slightly above new minimum) → Wage compression → Worker dissatisfaction ↑ → Morale and motivation ↓ → Potential reduction in workplace efficiency.

✅ Real-life Application:

In hospitality and retail, supervisors earning £1–£2/hour above minimum wage often do not get proportionate pay increases → Leading to resentment and disputes over fairness within firms (British Hospitality Association, 2023).

✅ Stakeholder Focus (Evaluation 2):

Workers close to, but above, minimum wage → Experience dissatisfaction and worsened work relations.

JOB LOSSES