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Labour Market Economics
February 2014

Evaluation of the Economics of a
£7 National Minimum Wage
Get help from fellow
students, teachers and
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Case Study: Low Pay in the UK
Low pay has long been an issue in the UK (and elsewhere) with
debate raging about how to address the issue.
Trade Union power has been in decline however New Labour
acknowledged that low pay was a market failure and introduced
the National Minimum Wage (NMW) in 1999.
The NMW increased in real terms until the start of the recession
after which inflation has outstripped minimum wage growth.
Recently, the idea of a Living Wage has divided opinion even
further!

.......what do you think?!!
Background Data on Low Pay and High
Pay in the UK Labour Market
Median full-time gross weekly earnings by major occupation group, UK, April 2013

Major occupation group
All
1 - Managers, directors and senior officials
2 - Professional occupations
3 - Associate professional and technical occupations
4 - Administrative and secretarial occupations
5 - Skilled trades occupations
6 - Caring, leisure and other service occupations
7 - Sales and customer service occupations
8 - Process, plant and machine operatives
9 - Elementary occupations

Men
556.0
821.2
755.0
624.7
436.8
486.3
370.4
345.0
450.0
360.0

£ per week
Women
All
458.8 517.5
651.6 765.1
655.2 703.2
519.0 582.4
384.3 399.6
345.3 476.1
325.5 336.7
321.5 331.2
325.8 436.1
284.5 336.4

Source: Annual Survey of Hours and Earnings - ONS, published December 2013
The National Minimum Wage
Group

2013 (current
rate of NMW)

Number of people paid
below NMW

21 and over

6.31

203,000

18 to 20

5.03

57,000

Under 18

3.72

19,000

Apprentice*

2.68

Source: https://www.gov.uk/national-minimum-wage-rates
Earnings for full-time employees, UK,
2009 to 2013
£
Gross hourly earnings (excluding overtime)

Year

Median gross Median gross
weekly
annual
earnings
earnings

Median

10% earned
less than

10% earned
more than

2009

488.5

25,806

12.33

6.90

25.90

2010

498.5

25,882

12.50

7.00

26.28

2011

500.7

26,244

12.62

7.01

26.75

2011

498.3

26,095

12.56

7.00

26.60

2012

506.1

26,472

12.77

7.17

26.62

2013

517.5

27,017

13.03

7.28

27.02

Source: Annual Survey of Hours and Earnings - Office for National Statistics
Distribution of gross hourly earnings
(excluding overtime), UK, April 2013
£ per hour
Full-time Part-time
Men
10% earned less than
7.50
6.19
50% earned less than
13.60
7.95
10% earned more than
29.59
23.65
Women 10% earned less than
7.00
6.19
50% earned less than
12.24
8.40
10% earned more than
23.55
19.50
All
10% earned less than
7.28
6.19
50% earned less than
13.03
8.29
10% earned more than
27.02
20.21

All
6.90
12.86
28.88
6.40
10.33
22.13
6.56
11.56
25.42

Source: Annual Survey of Hours and Earnings - Office for National Statistics
The Minimum Wage
Real
wage
S
NMW
W1

D
Q3

Q1

Q2

Quantity of workers
The Minimum Wage…. The winners
Real
wage
S
NMW
W1

D
Q3

Q1

Q2

Quantity of workers
The Minimum Wage…. The losers
Real
wage
S
NMW
W1

D
Q3

Q1

Q2

Quantity of workers
Monopsony Employer Analysis
Wage

Monopsony Employer

Profit maximising employment
level is where MRPL = MC labour

This gives employment of E1 – the
marginal revenue product is W1
MC labour
W1
Labour
supply

W2
Labour
Demand
(MRPL)

E1

Labour
(Employment)

But employer needs only pay an
average weekly wage of W2 to
hire these workers
Monopsony employer using their
buying wage to pay wages below
the fair value of output from their
employees

An abuse of market power?
A cause of relative poverty?
Monopsony Employer with a statutory
Minimum Wage
Minimum wage is a pay floor

Wage

Possible Effects of a Minimum Wage

Minimum hourly pay rate
Must be set above usual free
market wage
MC labour

Monopsonist must pay this wage
Employment rises to E2
More people employed at a higher
wage

Min
Wage
Labour
supply

W2
Labour
Demand
(MRPL)

Other factors affecting wages are
held constant in this analysis
Labour
(Employment)

E1

E2
Arguments for the £7 per hour minimum wage

1. Incentivises work
Analysis: Income gap between minimum wage (aided by increase
of personal allowance) and benefits (aided by welfare cuts) has
increased hence increasing opportunity cost of not working =
greater supply of labour and job vacancies filled
Evaluation: ‘Winners and Losers’
• This is particularly relevant to those workers in the
unemployment trap
• Reduced demand for labour, some people lose their job
• Still 400,000 vacancies in the UK
Arguments for the £7 per hour minimum wage
2. Less need for ‘benefit top up’
Analysis: If minimum wage workers receive an income which is
deemed satisfactory (be careful!!) then there is less need for the
taxpayer to fund tax credits and other income top ups. This
money can then be allocated into other areas ie
schools/hospitals.
Evaluation:
• It is more efficient with less chance of government failure if
government does not need to be involved!
• The role of government is to help out the people who need
them rather than leave it to firms!!
Arguments for the £7 per hour minimum wage
3. Boosts spending power of those on low incomes
Analysis: often spend that money in the local community creating a
strong local multiplier effect and with few leakages. This takes some
people out of poverty and reduces inequality
Evaluation:
• Some people are stuck in the benefit trap i.e. they lose benefits
due to their extra income which can negate the extra income
and even result in less disposable income!
Arguments for the £7 per hour minimum wage
4. Reduction of male-female pay differentials.
Analysis: Male-female wage differentials are reduced, as a
substantial proportion of those on low pay who benefit from the
NMW and increases are female.
Evaluation: Of course this doesn’t address the issue of gender pay
discrimination as shown recently:
Arguments for the £7 per hour minimum wage
5…. in the case of a monopsony employer ie NHS
Analysis: A minimum wage can help to counter the power of a
monopsonist employer. In this case the NMW could both increase
wages and save jobs.
The framework for analysis is the same as that for analysing the
impact of a trade union in a monopsonistic labour market.
However...a key counter argument to the NMW
is……..
Higher wage costs may filter through…..
Analysis: If the minimum wage adds to the cost of production,
then UK goods become more expensive causing cost push
inflation which hits living standards if they are necessities and
also reduces UK competitiveness
Evaluation:
• Bosses should push for compensating rises in productivity to
offset this problem
• In many areas, the UK is unable to compete on price and to do
so by the rationale above would mean paying poverty wages
So…..a reasoned conclusion
That’s your call………..!! But:
1. Don’t repeat
2. Don’t sit on the fence
3. Answer the question
My view is that there is little evidence to suggest that the NMW has
resulted in real wage/classical unemployment and as such the
incentive and income effects more than justify its introduction and it
increasing above the rate of inflation and of benefits growth. As
such, I think we should be proud of it.

………………….But you may disagree!!
Synoptic answers
Although this question relates to the labour market – it is
an example of a government intervention that has wider
economic effects – try to include some of these in your
answer.
A2 exams are synoptic so, do use AS (unit 1) concepts such
as
– Elasticity
– Consumer and producer surplus
– Externalities and welfare losses/gains
Get help from fellow
students, teachers and
tutor2u on Twitter:

#econ3
@tutor2u_econ
www.tutor2u.net

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A2 Micro: Economics of £7 Minimum Wage

  • 1. Labour Market Economics February 2014 Evaluation of the Economics of a £7 National Minimum Wage
  • 2. Get help from fellow students, teachers and tutor2u on Twitter: #econ3 @tutor2u_econ www.tutor2u.net
  • 3. Case Study: Low Pay in the UK Low pay has long been an issue in the UK (and elsewhere) with debate raging about how to address the issue. Trade Union power has been in decline however New Labour acknowledged that low pay was a market failure and introduced the National Minimum Wage (NMW) in 1999. The NMW increased in real terms until the start of the recession after which inflation has outstripped minimum wage growth. Recently, the idea of a Living Wage has divided opinion even further! .......what do you think?!!
  • 4. Background Data on Low Pay and High Pay in the UK Labour Market Median full-time gross weekly earnings by major occupation group, UK, April 2013 Major occupation group All 1 - Managers, directors and senior officials 2 - Professional occupations 3 - Associate professional and technical occupations 4 - Administrative and secretarial occupations 5 - Skilled trades occupations 6 - Caring, leisure and other service occupations 7 - Sales and customer service occupations 8 - Process, plant and machine operatives 9 - Elementary occupations Men 556.0 821.2 755.0 624.7 436.8 486.3 370.4 345.0 450.0 360.0 £ per week Women All 458.8 517.5 651.6 765.1 655.2 703.2 519.0 582.4 384.3 399.6 345.3 476.1 325.5 336.7 321.5 331.2 325.8 436.1 284.5 336.4 Source: Annual Survey of Hours and Earnings - ONS, published December 2013
  • 5. The National Minimum Wage Group 2013 (current rate of NMW) Number of people paid below NMW 21 and over 6.31 203,000 18 to 20 5.03 57,000 Under 18 3.72 19,000 Apprentice* 2.68 Source: https://www.gov.uk/national-minimum-wage-rates
  • 6. Earnings for full-time employees, UK, 2009 to 2013 £ Gross hourly earnings (excluding overtime) Year Median gross Median gross weekly annual earnings earnings Median 10% earned less than 10% earned more than 2009 488.5 25,806 12.33 6.90 25.90 2010 498.5 25,882 12.50 7.00 26.28 2011 500.7 26,244 12.62 7.01 26.75 2011 498.3 26,095 12.56 7.00 26.60 2012 506.1 26,472 12.77 7.17 26.62 2013 517.5 27,017 13.03 7.28 27.02 Source: Annual Survey of Hours and Earnings - Office for National Statistics
  • 7. Distribution of gross hourly earnings (excluding overtime), UK, April 2013 £ per hour Full-time Part-time Men 10% earned less than 7.50 6.19 50% earned less than 13.60 7.95 10% earned more than 29.59 23.65 Women 10% earned less than 7.00 6.19 50% earned less than 12.24 8.40 10% earned more than 23.55 19.50 All 10% earned less than 7.28 6.19 50% earned less than 13.03 8.29 10% earned more than 27.02 20.21 All 6.90 12.86 28.88 6.40 10.33 22.13 6.56 11.56 25.42 Source: Annual Survey of Hours and Earnings - Office for National Statistics
  • 9. The Minimum Wage…. The winners Real wage S NMW W1 D Q3 Q1 Q2 Quantity of workers
  • 10. The Minimum Wage…. The losers Real wage S NMW W1 D Q3 Q1 Q2 Quantity of workers
  • 11. Monopsony Employer Analysis Wage Monopsony Employer Profit maximising employment level is where MRPL = MC labour This gives employment of E1 – the marginal revenue product is W1 MC labour W1 Labour supply W2 Labour Demand (MRPL) E1 Labour (Employment) But employer needs only pay an average weekly wage of W2 to hire these workers Monopsony employer using their buying wage to pay wages below the fair value of output from their employees An abuse of market power? A cause of relative poverty?
  • 12. Monopsony Employer with a statutory Minimum Wage Minimum wage is a pay floor Wage Possible Effects of a Minimum Wage Minimum hourly pay rate Must be set above usual free market wage MC labour Monopsonist must pay this wage Employment rises to E2 More people employed at a higher wage Min Wage Labour supply W2 Labour Demand (MRPL) Other factors affecting wages are held constant in this analysis Labour (Employment) E1 E2
  • 13. Arguments for the £7 per hour minimum wage 1. Incentivises work Analysis: Income gap between minimum wage (aided by increase of personal allowance) and benefits (aided by welfare cuts) has increased hence increasing opportunity cost of not working = greater supply of labour and job vacancies filled Evaluation: ‘Winners and Losers’ • This is particularly relevant to those workers in the unemployment trap • Reduced demand for labour, some people lose their job • Still 400,000 vacancies in the UK
  • 14. Arguments for the £7 per hour minimum wage 2. Less need for ‘benefit top up’ Analysis: If minimum wage workers receive an income which is deemed satisfactory (be careful!!) then there is less need for the taxpayer to fund tax credits and other income top ups. This money can then be allocated into other areas ie schools/hospitals. Evaluation: • It is more efficient with less chance of government failure if government does not need to be involved! • The role of government is to help out the people who need them rather than leave it to firms!!
  • 15. Arguments for the £7 per hour minimum wage 3. Boosts spending power of those on low incomes Analysis: often spend that money in the local community creating a strong local multiplier effect and with few leakages. This takes some people out of poverty and reduces inequality Evaluation: • Some people are stuck in the benefit trap i.e. they lose benefits due to their extra income which can negate the extra income and even result in less disposable income!
  • 16. Arguments for the £7 per hour minimum wage 4. Reduction of male-female pay differentials. Analysis: Male-female wage differentials are reduced, as a substantial proportion of those on low pay who benefit from the NMW and increases are female. Evaluation: Of course this doesn’t address the issue of gender pay discrimination as shown recently:
  • 17. Arguments for the £7 per hour minimum wage 5…. in the case of a monopsony employer ie NHS Analysis: A minimum wage can help to counter the power of a monopsonist employer. In this case the NMW could both increase wages and save jobs. The framework for analysis is the same as that for analysing the impact of a trade union in a monopsonistic labour market.
  • 18. However...a key counter argument to the NMW is…….. Higher wage costs may filter through….. Analysis: If the minimum wage adds to the cost of production, then UK goods become more expensive causing cost push inflation which hits living standards if they are necessities and also reduces UK competitiveness Evaluation: • Bosses should push for compensating rises in productivity to offset this problem • In many areas, the UK is unable to compete on price and to do so by the rationale above would mean paying poverty wages
  • 19. So…..a reasoned conclusion That’s your call………..!! But: 1. Don’t repeat 2. Don’t sit on the fence 3. Answer the question My view is that there is little evidence to suggest that the NMW has resulted in real wage/classical unemployment and as such the incentive and income effects more than justify its introduction and it increasing above the rate of inflation and of benefits growth. As such, I think we should be proud of it. ………………….But you may disagree!!
  • 20. Synoptic answers Although this question relates to the labour market – it is an example of a government intervention that has wider economic effects – try to include some of these in your answer. A2 exams are synoptic so, do use AS (unit 1) concepts such as – Elasticity – Consumer and producer surplus – Externalities and welfare losses/gains
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