Labour Market

The National Minimum Wage is an example of regulation of the labour market. Some economists believe such regulation leads to increases in unemployment and inflation. Critically evaluate the evidence supporting this view and other that the National Minimum Wage increases employment.

The essay needs to be started with some of the economics opinions to have closer look at the professional point of view.

It is the first evidence that a series of inflation-busting rises since 2003 has undermined employers' ability to pay staff more than the minimum wage.

The commission said it was also seeing signs that recent rate increases had led to price inflation in some sectors for the first time.

… Chairman Paul Myners said the commission had previously been happy that the rate had not had any "significantly adverse impact" on profits, jobs or inflation. This year the picture was "more mixed".

"The bite of the minimum wage has increased and there's growing evidence of an impact on pay differentials," he said.

Telegraph By Richard Tyler

Last Updated: 1:20am GMT 08/03/2007

"Unemployment has risen to its highest level since 2002 … Economics text books will tell you that raising the price of a good, in this case labour, will increase supply but choke off demand. The existence of unemployment, and the fact that it's rising, shows that labour is too expensive. There's a fair amount of it about that isn't being used.

The reasons for unemployment are complex but the price of labour is a key. Personally, I don't agree with those people who have consistently argued, since its introduction in April 1999 at Ð'Ј3.60 an hour, that the measure risks being a root cause of heavy unemployment. There were grave predictions of 2 million out of work as a result of the measure. That hasn't happened, especially while the minimum wage was still well below the market price for unskilled labour.

But the aim of catch up, which I think the national minimum wage has achieved rather well, is pretty much over. At Ð'Ј5.35 it is close to, or at the starting threshold, for many employers in transparent and competitive markets such as retail. We are about to go from a mildly positive social good from putting a floor under wages, to a negative outcome. Rates of increase (the latest will be 6pc) have been comfortably outstripping earnings growth.

While the predictions of widespread unemployment have proved wide of the mark so far, the measure carries rather more subtle threats. For one I suspect we are embarked on a phase of slowing job creation. Costs are rising for employers, in particular energy and taxes, but also labour costs".

By Damian Reece

Last Updated: 12:12am BST 17/08/2006

"The reasons put forward to support an NMW cover three broad areas:

social - a minimum wage would attack low pay and poverty

equity - a minimum wage reduces exploitation, protects employers against under-cutting on wages, and cuts the cost to taxpayers of topping up low incomes via the social security system

economic - extra demand in the economy would increase employment; a minimum wage could also boost investment and productivity".

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On 1St April 1999 the national minimum wage came in force, it is an important cornerstone of Government strategy aimed at providing employees with decent minimum standards and fairness in the workplace.

It applies to nearly all workers and sets hourly rates below which pay must not be allowed to fall. It helps business by ensuring companies will be able to compete on the basis of quality of the goods and services they provide and not on low prices based predominantly on low rates of pay. The rates set are based on the recommendations of the independent Low Pay Commission. (Department for Business Enterprise and Regulatory Reform)

Given a limited level of production or quantity of products and services which can be bought by the wages and thus represents the maximum real value of all wages paid in society, differentials are the only means for determining the individual level of wages. However, the level of production is variable and it will rightly be argued that the form of differentials impacts on productivity in many ways, e.g. incentives to develop regions and sectors, to improve skills, and to raise output (Strumlin, 1921- 23). Also, skill differentials may be too low to provide an incentive for training or to take responsibility and thus discourage the development of skills. Hence, indirectly, the form of wage differentials may encourage the development of productivity and by this the real value or level of wages in a society (Bolle De Bal, 1990)

To be able to consider the topic as fully understood lets look at the explanations of unemployment and inflation, as the topic stays they are the results of the NMW (described above).

Unemployment is the state in which a worker wants, but is unable, to work. The unemployment rate is the number of unemployed workers divided by the total civilian labor force.

Unemployment may have advantages as well as disadvantages for the overall economy. Notably, it may help avert runaway inflation, which negatively affects almost everyone in the affected economy and has serious long-term economic costs. However the historic assumption that full local employment must lead directly to local inflation has been attenuated, as recently expanded international trade has shown itself able to continue to supply low-priced goods even as local employment rates rise closer to full employment.

There is considerable debate among economists as to the causes of unemployment. Keynesian economics emphasizes unemployment resulting from insufficient effective demand for goods and service in the economy. Others point to structural problems, inefficiencies, inherent in labour markets.

Neoclasical economics tends to reject these explanations, and focuses more on rigidities imposed on the labor market from the outside, such as minimum wage laws, taxes, and other regulations that may discourage the hiring of workers.

Inflation as mentioned above is measured as the growth of the money supply in an economy, without a commensurate increase in the supply of goods and services. This results in a rise in the general price level