ChainWhat it assumes · how to break it
Start
The National Living Wage is raised above the market-clearing wage for low-skilled work, for example in hospitality and retail.
1
As a result, the wage floor is set above the equilibrium wage W*, so labour becomes more expensive for employers.
wage floor · equilibrium wage
wage floor · equilibrium wage
Assumes: The minimum is above the market wage for this work.
But: Where market wages are already higher, as for many jobs in London, the floor does not bind and nothing changes.
2
This means firms contract along the demand curve for labour (MRP) and employ fewer workers or fewer hours.
demand for labour · MRP
demand for labour · MRP
Best link to attack
Assumes: The labour market is competitive, so each firm is a wage taker.
Assumes: The labour market is competitive, so each firm is a wage taker.
But: If the employer is a monopsonist, the minimum wage becomes its marginal cost of labour, and employment can rise, up to the competitive level if the floor equals the competitive wage.
3
At the same time, more people want to work at the higher wage, so the quantity of labour supplied extends.
supply of labour
supply of labour
Assumes: Higher pay draws more people into this labour market.
But: If most of the people affected are already working, or face barriers such as caring responsibilities, supply extends very little.
4
Consequently, labour supplied exceeds labour demanded, creating unemployment equal to Ls − Ld, which falls hardest on young and low-skilled workers.
excess supply of labour · real-wage unemployment
excess supply of labour · real-wage unemployment
Assumes: Demand for labour is wage elastic.
But: Where labour is hard to replace with capital and demand for the product is price inelastic, as in care homes, demand for labour is inelastic and few jobs are lost.
End
Employment falls and unemployment rises among low-skilled workers, in the competitive model.
Evaluation chain
- E1However, whether jobs are lost depends on the labour market being competitive, and many low-wage labour markets are not.
- E2When one or a few employers dominate local hiring, such as a large warehouse or care-home chain in a small town, they pay below MRP and employ fewer workers than a competitive market would.
- E3As a result, a minimum wage set between the monopsony wage and the competitive wage makes the marginal cost of labour equal to the minimum wage, so the firm gains from hiring more workers until the floor meets the labour supply curve.
- E4So a moderate minimum wage rise may increase employment, while a rise that takes the floor above the competitive wage would still cause job losses.
Another way to attack it: Research since the National Minimum Wage was introduced in 1999, and Card and Krueger's study of fast-food restaurants in New Jersey in the early 1990s, found little evidence that moderate increases cost jobs.
Job losses may appear slowly, as firms freeze hiring and do not replace staff who leave.
Can you say this chain from memory?
Members can hide the links, test themselves and track which chains they have mastered.
Practise this chainMembers can hide the links, test themselves and track which chains they have mastered.
Questions this answers
- Using a diagram, explain how a minimum wage may cause unemployment.
- Assess the likely effects of an increase in the National Living Wage on employment.
- Evaluate the view that a minimum wage always reduces employment.
Diagram
Competitive labour market: minimum wage Wmin above equilibrium W*. Read Ld off the demand (MRP) curve and Ls off the supply curve at Wmin; labour supplied exceeds labour demanded, unemployment = Ls − Ld. Employment falls from Q* to Ld.
Reverse and related
Minimum wage falls relative to market wages → the floor stops binding, firms hire up to the equilibrium Q* and the excess supply of labour disappears.