A minimum wages can cause cost push inflation. This is because firms face an increase in costs which are likely to be passed on to consumers. This is even more likely if wage differentials are maintained.

A minimum wage may increase the number of people working on the black market.

A limitation of the minimum wage is that it doesn’t increase the incomes of the lowest income groups. This is because the poorest have to rely on benefits and are therefore not effected by the minimum wages.

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Also many who benefit from the min wage are second income earners and therefore the household is unlikely to be below the poverty line. A household with a single income earner just above the min wage is likely to be relatively poorer.

See also: Advantages of Minimum Wages

Evaluation of Min Wages

The effect of a min wage on unemployment is uncertain, the structure of the labour market is very important.

Empirical evidence from the US and the UK suggests that a moderate increase in the min wage doesn’t cause a fall in employment. Therefore the key question is how high the min wage can rise before causing unemployment.

The effect on wage differentials is important. For example skilled workers just above the min wage may feel they deserve more. However there doesn’t appear to have been much of a knock on effect.

There may be a good case for a regional minimum wage because wages tend to be lower in the north than the south. In London very few workers benefit from the minimum wage and in this region the Min wage could increase


Benefits of a Minimum Wage

Reduce Poverty. The minimum wage Increases the wages of the lowest paid. These workers will have an increase in income and this will reduce poverty.

Increase productivity. The efficient wage theory states that higher wages can increase the incentive for people to work harder and thus higher wages may increase labour productivity.

Increase the incentivess for the unemployed to accept a job.   There will be a bigger difference between the level of benefits and the income from employment. A minimum wage could increase the participation rate as the benefits of work become greater.

Increased Investment. Firms will have an increase incentive to invest and increase labour productivity because labour is more costly.

Counterbalance the effect of Monopsony employers. If firms have Monopsony power they can drive wages down by employing less workers. However, minimum wages will make this more difficult. Therefore a minimum wage could have a positive effect on employment.

Diagram of Minimum Wage on Monopsony

A monopsony pays a wage of W2 and employs Q2.

If a minimum wage was placed equal to W1, it would increase employment to Q1


When supply and demand are equal (i.e. when the supply function and demand function intersect) the economy is said to be at equilibrium. At this point, the allocation of goods is at its most efficient because the amount of goods being supplied is exactly the same as the amount of goods being demanded. Thus, everyone (individuals, firms, or countries) is satisfied with the current economic condition. At the given price, suppliers are selling all the goods that they have produced and consumers are getting all the goods that they are demanding.

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As you can see on the chart, equilibrium occurs at the intersection of the demand and supply curve, which indicates no allocative inefficiency. At this point, the price of the goods will be P* and the quantity will be Q*. These figures are referred to as equilibrium price and quantity.

In the real market place equilibrium can only ever be reached in theory, so the prices of goods and services are constantly changing in relation to fluctuations in demand and supply


The National Minimum

Wage today

The UK’s National Minimum Wage is here to stay. Although the Conservative Party abolished the wages councils and fought the introduction of the minimum wage, they no longer propose to remove it. In an interview in the Guardian in 2005, David Cameron, then the new leader of the

Conservatives, said ‘I think the minimum wage has been a success’ and ‘it turned out much better than many people expected, including the CBI’. In a 2008 lecture, the shadow chancellor, George Osborne, said that ‘modern Conservatives acknowledge the fairness of a minimum wage’. And the Conservative Mayor of London, Boris Johnson has supported a ‘living wage’ for London, essentially a higher minimum wage to take account of higher living costs in London. Many people have contributed to making the National Minimum Wage the success it is generally perceived to be today. Through careful, non-ideological research, academic economists have played their part.


The Employment Effects of the National Minimum Wage

The effects of the national minimum wage on the unemployment rate is a very contentious topic. Those who are in favor of increasing the minimum wage believe that it will benefit unskilled workers by increasing their standards of living, while those who are opposed claim that an increase in the minimum wage will reduce unskilled workers’ opportunities. The highly politicized nature of this issue makes it unlikely that a consensus will be reached soon.


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