The UK did not have a large unemployment issue at the time of introducing the legislation and the figure has been around 1 million for a few years. However to increase the nations overall allocative efficiency (approach a national PPF) full employment and utilisation of the labour factor is needed. There is truth in the economic principle of parties acting rationally and wishing to maximise their utility. In the labour market this could be applied by using the NMW as an incentive for people to move out of voluntary unemployment and may increase the number of horse worked by those who work part time. This could only be good for the economy as the supply of labour increases.
The NMW could ensure that whilst employees have increased wages and this should reduce the number of people dependant on the government via benefits. More people earning means less will need to claim job seekers allowance and acts as further saving for the government to spend elsewhere. The government’s budget will further rise as increased incomes mean a greater number of people paying taxation and the level of taxation could afford to rise be small increments. The wage gap will be addressed and the effect of wage differentials will hopefully be reduced by the introduction of a national minimum wage that applies to all regions.
The benefits discussed above are for employees but business should also gain for the NMW to be considered a useful tool in the economy. The argument that people’s incentive to work is increased also affects business as if people are happier in their jobs, they are less likely to consider leaving. This reduces labour turnover in markets, which is a major cost to business. Recruitment, retraining and the possible renegotiation of higher wages all raise costs for firms on a daily basis and are particularly detrimental for small firms with limited number of employees.
Business’ will also be encouraged to act in a more responsible way and will increase their human capital. The setting of a universal fee for labour means business will have to compete to employ the best. Overall, this could result in an increase in the quality of labour and their qualifications. Although, firms may not directly benefit from this the increase in labour market competitiveness, there will be a reduction in monopsonist power, which can only be beneficial in the long run.
The effect on labour markets will be positive and the overall economy will feel multiplier effects, as the increased consumer incomes will increase consumer spending, representing a net injection into the circular flow of income.
However, the arguments against the national minimum wage are far more compelling looking at what happens in the real world. Classical economists would use diagrams such as figure1, which represents the fact that a surplus of workers will arise from the NMW. Valuing labour at a price above equilibrium price creates an extension along the supply curve and a contraction along the demand curve. This would create unemployment.
Although the opposing argument says the NMW would help the poorest, the scissors effect would suggest otherwise. As those on lower incomes are usually in more elastic markets the unemployment created will be significantly larger than an inelastic labour market. This is shown in Fig. 1. Firms that have the highest concentration of low wage earners usually have homogeneous employees and will make them redundant. This defeats the point of the NMW, which is equity.
The current evidence intimates that the NMW has been set at such a low level that it has had a neutral effect on the economy. The effect has been minimal, although with the current level at £4.85 it is easy for the government to further raise this figure. This could be disastrous for the economy representing an irrecoverable cost for business. The current economic climate is stable but there is a risk that one day the NMW could be too high for employers to maintain resulting in job loss or bankruptcy for firms. The rise and cost could lead to overall cost-push inflation and the wage-price spiral, as consumers lose their surplus.
Whilst the NMW aims to address the wage gap it is not sufficiently targeted and will not affect wage differentials. Some areas will remain in deprivation whilst others prosper. Wage differentials could create a ripple effect where the next higher paid employee wants a higher wage too. Although asymmetry of information means this is unlikely, it is still a possibility it could raise business costs.
The effect on public sector finances could be negative. The unemployment created will increase the number of people on benefits. Further more the government will have to abide by it’s own legislation, and increase wages in the public sector. Overall government spending will increase.
In conclusion the NMW is not ideal for the UK economy. It has had limited success in reducing unemployment however if it was at a higher level, it could prove highly detrimental to business and consumers.. Inflation rates have shown little change as well as long-term unemployment figures. Most importantly is the fact that the people that the NMW aims to help will be most negatively affected if we are to believe classical economics.
