Think of the labour market as a big marketplace where workers (supply) offer their time and skills, and firms (demand) want to hire them. The price of hiring a worker is the wage (\$w\$). The quantity of workers hired is the employment level (\$L\$).
In a simple model, the supply curve slopes upward: higher wages attract more workers. The demand curve slopes downward: higher wages make firms hire fewer workers. The intersection gives the market equilibrium wage (\$w^*\$) and employment (\$L^*\$).
The government sets a floor price (\$M\$) below which wages cannot legally fall. It’s like putting a safety net under a tightrope walker – ensuring they don’t fall too low.
The NMW is intended to:
The NMW is below the equilibrium wage. It has no effect on wages or employment – the market continues to operate at \$w^*\$ and \$L^*\$.
The NMW sits above the equilibrium wage. Two main outcomes:
The net effect on employment depends on the elasticity of labour demand. If demand is elastic, a small wage increase can lead to a large drop in employment. If demand is inelastic, employment may not fall much.
Supply (S) and Demand (D) curves meet at equilibrium (\$w^*, L^*\$). The NMW (\$M\$) is drawn as a horizontal line. The intersection of \$M\$ with the supply curve shows the new wage for workers who stay employed. The area between \$D\$ and \$M\$ indicates potential employment loss.
| Wage (\$w\$) | Supply (\$L_s\$) | Demand (\$L_d\$) |
|---|---|---|
| \$w^*\$ | \$L^*\$ | \$L^*\$ |
| \$M\$ | \$L_s^M\$ | \$L_d^M\$ |
Note: \$Ls^M\$ > \$Ld^M\$ if \$M\$ > \$w^*\$, indicating a potential surplus of labour (unemployment).
1️⃣ Understand the key terms:
2️⃣ Use diagrams:
Draw a clear supply/demand graph, label \$w^*\$, \$L^*\$, \$M\$, and show the new employment level if \$M\$ > \$w^*\$. Highlight the area of potential unemployment.
3️⃣ Apply the concept of elasticity:
Explain how a highly elastic demand leads to a larger drop in employment when the NMW is set above \$w^*\$, whereas inelastic demand results in a smaller impact.
4️⃣ Use real‑world examples:
Mention recent UK NMW changes or the impact on sectors like hospitality or retail. This shows you can link theory to practice.
5️⃣ Practice word problems:
Work through sample questions that ask you to calculate the new equilibrium or the percentage change in employment after a minimum wage increase.
6️⃣ Keep it concise:
Use bullet points and short sentences. Avoid long paragraphs; exam time is limited!