ChainWhat it assumes · how to break it
Start
The National Living Wage rises faster than median earnings, lifting pay at the bottom of the wage distribution.
1
As a result, employers must raise the hourly pay of every worker earning below the new legal floor.
national minimum wage · wage floor
national minimum wage · wage floor
Assumes: Firms comply with the law.
But: Enforcement relies on HMRC inspections and complaints, so some employers underpay through unpaid hours, deductions for uniforms or false self-employment.
2
This means the gap between the lowest earners and median earners narrows, compressing the bottom of the wage distribution.
wage inequality
wage inequality
Assumes: Pay further up the scale does not rise by the same proportion.
But: If firms keep differentials and the rise ripples up the pay scale, the whole bottom of the distribution shifts up and the gap narrows little.
3
Consequently, the disposable income of low-paid households rises.
disposable income
disposable income
Assumes: Households keep most of the extra gross pay.
But: For workers on Universal Credit, benefit is withdrawn as earnings rise, and income tax and National Insurance may also apply, so net income rises by much less than gross pay.
4
Therefore, relative poverty falls and income inequality narrows, shown by a fall in the Gini coefficient.
relative poverty · Gini coefficient
relative poverty · Gini coefficient
Best link to attack
Assumes: Minimum wage earners live in low-income households.
Assumes: Minimum wage earners live in low-income households.
But: Many minimum wage earners are second earners or young people living with their parents in middle-income households, so household income inequality falls by less than wage inequality.
End
Wage inequality narrows at the bottom of the distribution and household income inequality falls slightly.
Evaluation chain
- E1However, the effect on inequality depends on whether minimum wage earners actually live in poor households.
- E2Because many minimum wage earners are second earners or young people living with their parents, a large share of the gain goes to households in the middle of the income distribution.
- E3In addition, many of the poorest households have nobody in work, so they gain nothing from a higher wage floor.
- E4So a minimum wage rise clearly narrows wage inequality, but its effect on household income inequality and poverty is much smaller.
Another way to attack it: If the higher floor costs some low-skilled workers their jobs or hours, their income falls, so the gap between households in work and households without work may widen.
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Questions this answers
- Assess whether raising the national minimum wage is an effective way to reduce income inequality.
- Explain how a minimum wage can reduce relative poverty.
- Discuss the policies a government could use to reduce income inequality.
Diagram
Lorenz curve: the curve shifts slightly towards the line of equality and the Gini coefficient falls. The competitive labour market diagram (Wmin above W*) can be added to show the workers who lose jobs.
Reverse and related
Minimum wage falls in real terms → the lowest wages fall behind median pay and wage inequality at the bottom widens.