ChainWhat it assumes · how to break it
Start
The National Living Wage rises, raising labour costs for low-wage employers such as supermarkets, fast-food chains and care providers.
1
As a result, labour becomes more expensive relative to capital.
relative factor prices
relative factor prices
Assumes: The cost of capital does not rise at the same time.
But: If interest rates rise or machinery becomes dearer at the same time, capital is not relatively cheaper and the incentive to switch is weak.
2
This means firms substitute capital for labour, for example by installing self-service checkouts and ordering kiosks.
capital–labour substitution
capital–labour substitution
Best link to attack
Assumes: Machines can do the tasks that low-paid workers do.
Assumes: Machines can do the tasks that low-paid workers do.
But: In care, cleaning and hospitality many tasks need human contact and cannot be automated cheaply, so substitution is limited.
3
Consequently, each remaining worker works with more capital, so output per worker rises.
labour productivity · capital per worker
labour productivity · capital per worker
Assumes: The new capital is used efficiently.
But: If staff are not trained to use the new equipment, or it breaks down often, output per worker rises little.
4
In addition, higher pay acts as an efficiency wage: workers are more motivated and fewer quit, so firms spend less on recruitment and staff build up experience.
efficiency wage · labour turnover
efficiency wage · labour turnover
Assumes: Higher pay changes workers' effort and loyalty.
But: When every employer must pay the same floor, no job looks better than another, so the motivation and retention effect may be small.
End
Labour productivity rises as firms invest in capital, and as better-paid workers work harder and stay longer.
Evaluation chain
- E1However, the rise in productivity depends on whether firms can substitute capital for labour.
- E2Since much low-paid work is in personal services such as care and hospitality, there is often no affordable machine that can do the job.
- E3As a result, firms facing higher labour costs raise prices, cut hours or accept lower profits instead of investing.
- E4So productivity rises most in sectors such as retail where automation is possible, and may barely change in labour-intensive services.
Another way to attack it: Measured productivity can also rise simply because the least productive workers lose their jobs, which raises output per worker without any rise in total output.
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Questions this answers
- Assess the extent to which a higher minimum wage may raise labour productivity.
- Explain the efficiency wage argument for raising the minimum wage.
- Discuss the effects of a rise in the National Living Wage on firms.
Diagram
No standard diagram. On the competitive labour market diagram, higher productivity shifts the MRP curve right, offsetting the job losses at Wmin. The spread of self-service checkouts and ordering kiosks in supermarkets and fast-food chains supports the substitution step.
Reverse and related
Minimum wage falls in real terms → cheap labour reduces the incentive to invest in capital, and low productivity can persist.