Posted on by John Sloman

Employment and the UK minimum wage

The UK’s Low Pay Commission has just published its annual report. This shows that the lowest-paid 20% of workers aged 25 and over benefited from last April’s 4.4% rise in the ‘National Living Wage (NLW)’, the name the government gives to the statutory minimum wage for people in this age group. Although only around 6.5% of such workers are paid at the NLW, when it rises this tends to push up wage rates which are just above the NLW as employers seek to maintain the differential.

If the new NLW is above the equilibrium rate for those receiving it, it would be expected that firms would respond by employing fewer workers. However, the Low Pay Commission found no evidence that rises in the NLW caused unemployment. Instead, employers responded by combinations of increasing prices, accepting lower profit margins, restructuring their workforce and reducing the gaps between pay bands.

Over the longer term, employers often seek to increase labour productivity to offset the higher cost per worker of paying increased minimum wage rates. This, however, could lead to a reduction in employment if it involves substituting capital for labour or if greater labour efficiency does not result in a sufficient increase in total output to compensate for an increase in output per worker.

Articles

Report and data

Questions

  1. Demonstrate on a supply and demand diagram for a perfectly competitive labour market the impact of a rise in the minimum wage on employment and unemployment in that market. Assume that the market is initially in equilibrium at the previous minimum wage rate.
  2. For what reasons in such markets may a rise in the minimum wage not lead to a rise in unemployment?
  3. Now demonstrate the effect of a rise in the minimum wage in a monopsonistic market. Assume that the previous minimum wage was previously being paid by the employer.
  4. For what reasons may the employer in the previous question choose to retain employment at the current level?
  5. For what reasons may the effect of a rise in the minimum wage be different in the long run from the short run?
  6. How can employers avoid paying the minimum wage (a) when workers work in the ‘gig’ economy; (b) when workers have to travel as part of their job: e.g. care workers moving from house to house; (c) workers working from home producing items for an employer, such as clothing or jewelry, or providing a service such as telesales?