ChainWhat it assumes · how to break it
Start
The government raises the National Living Wage by more than average earnings growth, on the advice of the Low Pay Commission.
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
In addition, firms raise the pay of workers just above the floor to keep pay differentials between grades, so the rise ripples up the pay scale.
pay differentials · ripple effect
pay differentials · ripple effect
Best link to attack
Assumes: Firms want to keep differentials so that workers still have a reason to take on supervisory and skilled roles.
Assumes: Firms want to keep differentials so that workers still have a reason to take on supervisory and skilled roles.
But: Firms facing a cost squeeze may let differentials shrink, so supervisors end up earning little more than new starters and the ripple stops close to the floor.
3
Consequently, average hourly pay in low-paying sectors such as hospitality, retail and social care rises.
wage determination
wage determination
Assumes: Firms do not cut hours or other parts of the pay package.
But: If employers cut paid hours, paid breaks, overtime premiums or bonuses, weekly earnings rise by less than the hourly rate.
End
Hourly pay rises for workers at and just above the floor, lifting wages across low-paying sectors.
Evaluation chain
- E1However, how far wages rise above the floor depends on whether firms keep their pay differentials.
- E2When firms' margins are thin, as in hospitality and social care, they may absorb the cost by holding down pay just above the minimum.
- E3As a result, more workers end up on exactly the minimum, and the gap between new starters and experienced or supervisory staff narrows.
- E4So a minimum wage rise lifts wages at the very bottom by the full amount, but its effect on wages further up the pay scale may be small.
Another way to attack it: If the rise prices some workers out of jobs, their wage falls to zero, so the average wage of those still in work rises while the total wage income of the low paid may not.
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Questions this answers
- Explain how an increase in the National Living Wage may affect the wages of workers paid above the minimum.
- Assess the effects of a rise in the national minimum wage on low-paid workers.
- Discuss whether a higher minimum wage is the best way to raise the pay of low-skilled workers.
Diagram
Competitive labour market: draw a horizontal minimum wage Wmin above the equilibrium wage W*. Workers who keep their jobs are paid Wmin instead of W*; employment is read off the demand (MRP) curve at Ld, so not everyone who worked at W* keeps a job.
Reverse and related
Minimum wage frozen or cut in real terms → the floor falls behind market wages and pay for the lowest paid is set more by supply and demand.