Minimum Wage - A Level Economics Data Response Plan

In this video we walk through a suggested answer to a data response question on the macroeconomic effects of a higher minimum wage.

Here is the question:

Using the data provided, assess the likely impact of a rise in the UK national minimum wage on twomacroeconomic objectives of the government. (15)

Background on the UK Minimum Wage (June 2020)

• The UK National Minimum Wage applies to most workers and sets minimum hourly rates of pay.
• NMW rates vary by age group. From April 2019, the UK minimum wage is:
• £8.72 per hour for adults aged 25 and over
• £8.20 for 21-24-year olds
• £6.45 for 18-20-year olds
• £4.55 for 16-17-year olds
• £4.15 for apprentices aged under-19

The Changing UK Minimum Wage

The value of the minimum wage rate has increased in real terms since the NMW was first introduced in 1999. However, in the aftermath of the 2008/09 recession, the real value of all minimum wage rates decreased. The Low Pay Commission estimates that there were 2 million workers paid at or below the minimum wage in 2019, around 7% of all UK workers.

Nearly half (48%) of all jobs paying at or below the minimum wage are in retail, hospitality and cleaning & maintenance occupations.

The UK has a relatively high minimum wage, in terms of monetary value. In 2019, the UK had the seventh highest adult minimum wage out of 27 OECD countries after considering differences in the cost of living.

KAA Point 1

A higher minimum wage might lead to faster economic growth. This is because higher wages lead to increased real disposable income for lower income families. They tend to have a high MPC and increase in real incomes will drive more consumption which then leads to an outward shift in AD causing an expansion of short run aggregate supply and thus a higher equilibrium level of GDP.

Evaluation Point 1

However, the impact of a higher minimum wage might be limited if it leads to cost-push inflationary pressure which leads to higher consumer prices and perhaps a fall in real incomes. A higher NMW would increase the costs facing many firms e.g. in hospitality and retailing and they might pass this on to consumers depending on the price elasticity of demand for their output.

KAA Point 2

Another possible impact of a rise in the NMW might lead to higher level of unemployment in the labour market. This is because increased costs will lower business profits perhaps leading to some worker lay-offs as businesses replace labour with capital. Holding wages above the equilibrium leads to a contraction in labour demand and a possible excess supply of labour (i.e. classical unemployment)

Evaluation Point 2

However, lifting the NMW might also lead to higher labour productivity which helps to keep unit labour costs low and sustains business profits. In addition, a Keynesian view would be that paying higher wages leads higher consumer demand which could lead to an accelerator effect on business investment. If investment increases, this might increase employment in capital-goods industries.