IGCSE Economics 0455 – Workers and the National Minimum Wage
Microeconomic Decision‑makers: Workers
Objective
To understand how government policy, particularly the National Minimum Wage (NMW), influences the process of wage determination in a competitive labour market.
Key Concepts
Labour supply and demand
Equilibrium wage
Wage floor (minimum wage)
Elasticity of labour supply and demand
Unemployment (structural, frictional, cyclical)
Income distribution and poverty reduction
National Minimum Wage (NMW)
The NMW is a legally‑mandated wage floor set by the government. It is intended to:
Protect low‑paid workers from exploitation.
Reduce in‑work poverty.
Set a baseline for fair pay across industries.
In most economies the NMW is expressed as an hourly rate and is periodically reviewed to reflect inflation and productivity growth.
How the NMW Affects Wage Determination
Setting a price floor: If the NMW is above the market‑clearing wage, it becomes a binding price floor.
Impact on labour supply: A higher wage makes work more attractive, potentially increasing the quantity of labour supplied.
Impact on labour demand: Higher labour costs may cause firms to reduce the number of workers hired, especially if demand is price‑elastic.
Resulting surplus (unemployment): The difference between the quantity of labour supplied and demanded at the NMW creates involuntary unemployment.
Wage spill‑over effects: In sectors where the NMW is not binding, wages may rise as firms adjust pay structures to maintain morale and avoid turnover.
Long‑run adjustments: Over time, firms may invest in labour‑saving technology, shift production methods, or relocate to lower‑cost regions.
Elasticity Considerations
The magnitude of the NMW’s impact depends on the elasticities of labour supply (\$\varepsilonS\$) and demand (\$\varepsilonD\$):
\$\varepsilon = \frac{\%\Delta Q_w}{\%\Delta W}\$
Where \$Q_w\$ is the quantity of labour and \$W\$ is the wage rate. A highly elastic demand means a small rise in wages leads to a large fall in employment.
Summary of Effects
Group Affected
Positive Effects
Negative Effects
Low‑paid workers
Higher take‑home pay; reduced in‑work poverty
Risk of job loss if firms cut staff
Employers
Improved staff morale; reduced turnover
Increased labour costs; possible reduction in hiring
Overall economy
Potential boost to consumer spending
Higher unemployment; possible inflationary pressure
Suggested Diagram
Suggested diagram: Labour market showing supply and demand curves, the equilibrium wage (W*), and a binding National Minimum Wage (W_min) above W*, illustrating the resulting surplus of labour (unemployment).
Evaluation Points for Exam Answers
State whether the NMW is binding or non‑binding in the given context.
Explain short‑run versus long‑run effects on employment and prices.
Consider the role of labour‑market institutions (trade unions, minimum‑wage boards).
Discuss distributional impacts – who gains and who loses?
Use real‑world examples (e.g., UK, USA, Australia) to illustrate points.