Intervention in Setting Wages

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National Minimum Wage

The National Minimum Wage is a government-imposed law to try to improve the equality of living standards. National minimum wage makes sure the poorest in society have enough for their own basic needs.

NMW in the UK

The national minimum wage establishes minimum hourly pay rates for various age groups.
The UK government brought in a national minimum wage in 1999. In 2018, it was £7.83 per hour for over 25s.
The wage is designed to stop workers from being exploited.

Effect of NMW on labour markets

In a perfectly competitive labour market, the minimum wage will raise the wage level above equilibrium.
This will cause firms to downsize, and there will be excess supply at the new wage level. This will generate unemployment.

Elasticities and the NMW

The more inelastic the supply of labour of labour is, the smaller the increase in unemployment.
Very elastic labour supply could lead to a large fall in employment.
This is a market failure.

Benefits and Costs of the Minimum Wage

There are a number of costs and benefits associated with the minimum wage.

Benefits of the minimum wage

Workers should get a high enough wage to afford the essentials of life. This reduces poverty levels.
- E.g food, clothing.
Incentivises people to work and get off unemployment benefits.
It may increase the marginal revenue product of workers.
Minimum wage can improve worker morale and productivity.

Costs of the minimum wage

The introduction of a minimum wage reduces the quantity demanded of low-skill labour, leading to lost jobs and sometimes worsening of inequality.
It can increase firm costs.
It can decrease competitiveness.
It may not actually alleviate poverty. This is because many of society's poorest members are unable to work (e.g. elderly), so cannot benefit.
Setting the minimum wage below market equilibrium will have no effect.

The Living Wage and the Maximum Wage

A maximum wage can be set by the government if they believe wages are becoming too high in some industries. A living wage covers basic living costs on an hourly rate.

Maximum wage - pros

Can encourage hiring, often reducing unemployment levels.
Can prevent wages spiralling out of control.
Can reduce inequality (particularly if it's combined with a minimum wage).

Maximum wage - cons

Can reduce motivation as many workers are incentivised by higher pay and pay promotions.
Workers may migrate abroad if they have higher earning prospects in other countries (that don't have maximum wages).
Some people think its unfair to limit the rewards a worker can gain.

Living wage

The Living Wage Foundation sets the UK's living wage rate.
At present, it's higher than the UK's national minimum wage.
The London living wage rate is higher than that for the rest of the country.
- Employers voluntarily decide to meet the living wage rate. More than 1,000 employers in the UK have agreed to do so.