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Assess the arguments for and against the national minimum wage

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Introduction

Assess the arguments for and against the national minimum wage (NMW) The national minimum wage was introduced in the UK in April 1999 by the Labour government. Essentially it formed a major part of their manifesto as it convinced the average population that Labour were beneficial for everybody. However, they would argue against classical economics and suggest there are wide spread benefits to be gained. The main argument is that the NMW would alleviate poverty across the country. This is an equity issue that has constantly concerned society and would go some way to redistribution of income. It is a social belief that if every one is 'well off' and lives above the poverty line, there will be positive social externalities for all. For example, those living in poverty are usually more susceptible to disease due to poor living standards. This in turn costs the taxpayer money through NHS treatment. Paying those on the low wages higher will help prevent this and the formation of many large impoverished areas, which tend to develop law and order problems like Tower Hamlets, London. ...read more.

Middle

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. ...read more.

Conclusion

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. ...read more.

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