• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Discuss the view that minimum wage legislation leads to unemployment. Has this been the recent experience of the UK?

Extracts from this document...


Discuss the view that minimum wage legislation leads to unemployment. Has this been the recent experience of the UK? Minimum wage legislation is often contemplated by governments as a way of combating poor wages and the poverty that typically accompanies these wages. This is a direct form of government intervention and its use causes a great deal of debate, particularly from Classical (or free market) economists. Free Market economists argue that the minimum wage causes unemployment. This paper will discuss the argument that minimum wage causes unemployment and go on to analyse whether this has been the case in the UK over recent years. When a government introduces a minimum wage it sets a wage level to which every worker is entitled. Any employer which pays less than this minimum wage does so only by breaking the law. A minimum wage only has an effect if placed above the market equilibrium as can be seen in Fig.1. When the minimum wage is implemented the supply of workers increases as more are willing to work for the higher wage and we move up the labour supply curve. At the same time employers are less able to afford as many workers at the higher wage level and reduce the amount of workers that they employ. ...read more.


can hopefully show the effect of the NMW in numerical terms. Obviously unemployment is affected by other variables but if we expect these variables to be relatively stable then it is the introduction of the NMW that will have the greatest effect. All that can be seen is whether there is a strong positive effect on unemployment after the NMW is introduced.2 Using Eviews, the coefficient obtained for the minimum wage dummy variable was 0.495058. This tells us that the impact of the minimum wage has been to increase unemployment. The R squared value of 0.92607 suggests that the model is representative but this may also be due to heteroskedasticity being present in the model. On the basis of this model the NMW has increased unemployment. Whilst the results of my simple regression were positive showing a connection between the NMW and unemployment, it is unsafe to draw a firm conclusion from the results. This is because it includes too few variables. Even the work of Benjamin Nardella3 which included a total of nine variables cannot statistically prove the effect of a minimum wage. Most models will confirm a connection between minimum wages and unemployment, but Machin4 argues 'the effect of a minimum wage always depends on the assumptions that the modeller makes prior to the experiment.' ...read more.


Appendix 1.1 Annual unemployment figures for Fig.2 (quarterly figures included in chart and regression for greater accuracy) 1992 9.8 1993 10.5 1994 9.8 1995 8.8 1996 8.3 1997 7.2 1998 6.2 1999 6.1 2000 5.6 2001 4.9 2002 5.2 2003 5.0 1.2 Results of statistical regression: Dependent Variable: UNEMPLOYMENT Method: Least Squares Date: 03/30/04 Time: 15:56 Sample(adjusted): 1992:1 2003:3 Included observations: 47 after adjusting endpoints Variable Coefficient Std. Error t-Statistic Prob. C 18.26817 0.749137 24.38561 0 MW 0.495058 0.314841 1.572408 0.123 GDP -5.43E-05 4.08E-06 -13.30164 0 R-squared 0.92607 Mean dependent var 7.140426 Adjusted R-squared 0.92271 S.D. dependent var 1.943625 S.E. of regression 0.540349 Akaike info criterion 1.668499 Sum squared resid 12.84699 Schwarz criterion 1.786593 Log likelihood -36.20972 F-statistic 275.5801 Durbin-Watson stat 0.141813 Prob(F-statistic) 0 1.3 Results of Benjamin Nardella's regression: Dependent Variable: UNEMP Method: Least Squares Date: 11/04/03 Time: 23:43 Sample(adjusted): 1959:01 2002:09 Included observations: 525 after adjusting endpoints Variable Coefficient Std. Error t-Statistic Prob. MINIMUMWAGE 1.113130 0.180466 6.168085 0.0000 MONEYSUPPLY 0.001590 0.000205 7.741704 0.0000 POPULATION 0.000194 1.33E-05 14.62016 0.0000 REALGDP -0.005619 0.000180 -31.22630 0.0000 LABORFORCE 0.000416 1.76E-05 23.66911 0.0000 INFLATION -0.173792 0.016102 -10.79290 0.0000 GOVTSUP 0.000626 0.000459 1.362775 0.1735 CPI -0.158707 0.009237 -17.18170 0.0000 C -37.48853 2.088863 -17.94686 0.0000 R-squared 0.829552 Mean dependent var 5.917714 Adjusted R-squared 0.826909 S.D. dependent var 1.478307 S.E. of regression 0.615038 Akaike info criterion 1.882727 Sum squared resid 195.1879 Schwarz criterion 1.955814 Log likelihood -485.2159 F-statistic 313.9142 Durbin-Watson stat 0.334728 Prob(F-statistic) 0. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Macroeconomics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level Macroeconomics essays

  1. Free essay

    Define and determine the types and trends of UK unemployment

    4 star(s)

    Many of the unemployed from heavy manufacturing industry (e.g. in coal, steel and heavy engineering) have found it difficult to gain re-employment without an investment in re-training. This problem is one of occupational immobility. * Hidden unemployment: This is when unemployed people are interested in taking part in work, but currently not classified as unemployed.

  2. Comparing the effects of immigration on GDP in Malaysia, Japan and South Africa.

    These have raised the urgency of Japan to reduce labor shortages. In response, the government has begun to consider relaxing restrictions on employment of certain categories of workers for which there are serious labor shortages. Therefore, this causes the increase in the immigrants to Japan.

  1. How have the Rates of Inflation in the UK Changed Since the Monetary Policy ...

    has changed over the past decade and this can be compared to how the RPIX (retail price index excluding mortgage repayments) has changed over the same time period by looking at graph 1. It shows that there is not a huge amount of difference between the two, which means that

  2. Budget 2004-05 and Economic Analysis of Pakistan

    Electricity, gas, water supply and construction have registered growth above the target rate. Most notable performance has been witnessed in construction and gas and electricity sub-sectors. Against a decline of 2.5% last year, a phenomenal growth of 23% was recorded in the case of gas and electricity sub-sector.

  1. Unemployment Report.

    The crucial element of the model is that all movements of the output are movement of the natural rate. As we are dealing with real rather than monetary shocks we would have to consider interest rates and real wages. For e.g.

  2. Indian Economics

    Unemployment is a complex phenomenon and takes many forms. The Important forms are: 1. Frictional Unemployment: Frictional unemployment is a temporary phenomenon. It may result when workers are temporarily out of work while changing jobs. It may also result when the work is suspended due to strikes or lockouts or due to imperfect mobility of labours.

  1. What are the main differences between the 'natural rate of unemployment' and the 'NAIRU' ...

    The ability of the unions to act as a monopsonistic supplier of labour is limited by the degree of industry centralization. A single-firm union can make its workers better off by raising their wage relative to other wages, but a national union is more likely to choose the level of

  2. Suppose a government wishes to raise incomes of the working poor. It suggests the ...

    However, the overall levels of unemployment have increased from 4.2% (Birmingham Unemployment Briefing, 1999) to 5.1% between 1999 and 2003 (National Statistics Online, 2003). This implies that introducing a National Minimum Wage induces a trade-off between an increase in

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work