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

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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. As is seen in Fig.1 there is a simultaneous move up the labour demand curve. The introduction of the minimum wage has therefore created unemployment of QaQb.


Source: www.bized.ac.uk

The introduction of a minimum wage can have one of two effects. If the theory holds out and workers are laid off, then it will be lower paid workers who lose their jobs and the effect of the minimum wage will be a detrimental one. If the theory does not hold then the minimum wage will have its desired effect and raise the wages of those low paid workers and help raise their standard of living. The existence of a causal link between minimum wage policy and unemployment is a crucial issue because if there is such a link the policy may be harming the workers it is seeking to protect.

A view taken by the Employment Policies Institute is that a minimum wage will keep more people on benefits for longer. The people that occupy the low paid jobs are very often very low skilled, often illiterate. For these individuals, entry level jobs represent their only employment opportunities. Without formal education and training, they cannot expect to walk into more skilled and more highly paid jobs. 

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There are arguments for and against minimum wage legislation but does the data show that the minimum wage has the desired effect, or are there obstacles that prevent its success? To try and answer this we can look at the recent experience of the United Kingdom. The National Minimum Wage (NMW) was introduced in Britain on 1st April 1999 at £3.60 per hour. Fig.2 looks at the quarterly data for unemployment from 1992 to 2003 to try and show any trends that might indicate the effect of the minimum wage.


Source: Labour Market Trends: Unemployment Rates - www.statistics.gov.uk


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