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The UK's national minimum wage sets the minimum hourly wage rate that is acceptable in
law. A national minimum wage has been law in the UK since 1999, when the adult hourly rate
was set at 3.60.
On the supply side the higher wage will encourage existing employees to supply more labour,
or it will encourage workers out ofvoluntary unemployment. The effect can be demonstrated
in the following diagram.
For example, a minimum wage of 5.00 would create a contraction in demand to Q1, but
supply would extent to Q2 as more low skilled workers are encouraged to look for work,
creating unemployment of Q1 Q2.
Evaluation
The advantages of a national minimum wage:
1.
Greater equity will be achieved, and the distribution of income between the
high paid and the low pay may be narrowed.
2.
Poverty may be reduced as the low paid gain more income and the unemployed
may be encouraged to join the labour market. In this case the higher wage is
an incentive for individuals to supply their labour.
3.
Less worker exploitation by labour market monopsonists, who are single
employers is able to pay below the market equilibrium.
The disadvantages of a national minimum wage:
1.
A high minimum wage can cause price inflation as firms pass on the higher
wages in higher prices.
2.
Falling employment, as demand contracts, and rising unemployment as supply
extends.
3.
The competitiveness of UK goods abroad can suffer compared with low wage
economies, such as China and India.
4.
Inward investment may be deterred, as foreign investors will look to avoid high
wage economies.
5.
The labour market may become inflexible in response to changes in the rest of
the economy.
6.
Workers and employers may be driven into the unofficial labour market.
The full impact depends upon:
1.
2.