The document discusses the economics of a proposed £7 national minimum wage in the UK. It provides background on low pay in the UK labour market, including median earnings by occupation and the impact of the existing national minimum wage. Both the potential benefits and costs of increasing the minimum wage are considered, such as incentivizing work, reducing the need for benefits, and boosting spending, as well as the risk of higher costs reducing competitiveness. The conclusion is that while a higher minimum wage may have some risks, there is little evidence it would cause unemployment, and the benefits justify increasing it above inflation and benefit levels.

1. Labour Market Economics
February 2014
Evaluation of the Economics of a
£7 National Minimum Wage

2. Get help from fellow
students, teachers and
tutor2u on Twitter:
#econ3
@tutor2u_econ
www.tutor2u.net

3. Case Study: Low Pay in the UK
Low pay has long been an issue in the UK (and elsewhere) with
debate raging about how to address the issue.
Trade Union power has been in decline however New Labour
acknowledged that low pay was a market failure and introduced
the National Minimum Wage (NMW) in 1999.
The NMW increased in real terms until the start of the recession
after which inflation has outstripped minimum wage growth.
Recently, the idea of a Living Wage has divided opinion even
further!
.......what do you think?!!

4. Background Data on Low Pay and High
Pay in the UK Labour Market
Median full-time gross weekly earnings by major occupation group, UK, April 2013
Major occupation group
All
1 - Managers, directors and senior officials
2 - Professional occupations
3 - Associate professional and technical occupations
4 - Administrative and secretarial occupations
5 - Skilled trades occupations
6 - Caring, leisure and other service occupations
7 - Sales and customer service occupations
8 - Process, plant and machine operatives
9 - Elementary occupations
Men
556.0
821.2
755.0
624.7
436.8
486.3
370.4
345.0
450.0
360.0
£ per week
Women
All
458.8 517.5
651.6 765.1
655.2 703.2
519.0 582.4
384.3 399.6
345.3 476.1
325.5 336.7
321.5 331.2
325.8 436.1
284.5 336.4
Source: Annual Survey of Hours and Earnings - ONS, published December 2013

5. The National Minimum Wage
Group
2013 (current
rate of NMW)
Number of people paid
below NMW
21 and over
6.31
203,000
18 to 20
5.03
57,000
Under 18
3.72
19,000
Apprentice*
2.68
Source: https://www.gov.uk/national-minimum-wage-rates

6. Earnings for full-time employees, UK,
2009 to 2013
£
Gross hourly earnings (excluding overtime)
Year
Median gross Median gross
weekly
annual
earnings
earnings
Median
10% earned
less than
10% earned
more than
2009
488.5
25,806
12.33
6.90
25.90
2010
498.5
25,882
12.50
7.00
26.28
2011
500.7
26,244
12.62
7.01
26.75
2011
498.3
26,095
12.56
7.00
26.60
2012
506.1
26,472
12.77
7.17
26.62
2013
517.5
27,017
13.03
7.28
27.02
Source: Annual Survey of Hours and Earnings - Office for National Statistics

7. Distribution of gross hourly earnings
(excluding overtime), UK, April 2013
£ per hour
Full-time Part-time
Men
10% earned less than
7.50
6.19
50% earned less than
13.60
7.95
10% earned more than
29.59
23.65
Women 10% earned less than
7.00
6.19
50% earned less than
12.24
8.40
10% earned more than
23.55
19.50
All
10% earned less than
7.28
6.19
50% earned less than
13.03
8.29
10% earned more than
27.02
20.21
All
6.90
12.86
28.88
6.40
10.33
22.13
6.56
11.56
25.42
Source: Annual Survey of Hours and Earnings - Office for National Statistics

8. The Minimum Wage
Real
wage
S
NMW
W1
D
Q3
Q1
Q2
Quantity of workers

9. The Minimum Wage…. The winners
Real
wage
S
NMW
W1
D
Q3
Q1
Q2
Quantity of workers

10. The Minimum Wage…. The losers
Real
wage
S
NMW
W1
D
Q3
Q1
Q2
Quantity of workers

11. Monopsony Employer Analysis
Wage
Monopsony Employer
Profit maximising employment
level is where MRPL = MC labour
This gives employment of E1 – the
marginal revenue product is W1
MC labour
W1
Labour
supply
W2
Labour
Demand
(MRPL)
E1
Labour
(Employment)
But employer needs only pay an
average weekly wage of W2 to
hire these workers
Monopsony employer using their
buying wage to pay wages below
the fair value of output from their
employees
An abuse of market power?
A cause of relative poverty?

12. Monopsony Employer with a statutory
Minimum Wage
Minimum wage is a pay floor
Wage
Possible Effects of a Minimum Wage
Minimum hourly pay rate
Must be set above usual free
market wage
MC labour
Monopsonist must pay this wage
Employment rises to E2
More people employed at a higher
wage
Min
Wage
Labour
supply
W2
Labour
Demand
(MRPL)
Other factors affecting wages are
held constant in this analysis
Labour
(Employment)
E1
E2

13. Arguments for the £7 per hour minimum wage
1. Incentivises work
Analysis: Income gap between minimum wage (aided by increase
of personal allowance) and benefits (aided by welfare cuts) has
increased hence increasing opportunity cost of not working =
greater supply of labour and job vacancies filled
Evaluation: ‘Winners and Losers’
• This is particularly relevant to those workers in the
unemployment trap
• Reduced demand for labour, some people lose their job
• Still 400,000 vacancies in the UK

14. Arguments for the £7 per hour minimum wage
2. Less need for ‘benefit top up’
Analysis: If minimum wage workers receive an income which is
deemed satisfactory (be careful!!) then there is less need for the
taxpayer to fund tax credits and other income top ups. This
money can then be allocated into other areas ie
schools/hospitals.
Evaluation:
• It is more efficient with less chance of government failure if
government does not need to be involved!
• The role of government is to help out the people who need
them rather than leave it to firms!!

15. Arguments for the £7 per hour minimum wage
3. Boosts spending power of those on low incomes
Analysis: often spend that money in the local community creating a
strong local multiplier effect and with few leakages. This takes some
people out of poverty and reduces inequality
Evaluation:
• Some people are stuck in the benefit trap i.e. they lose benefits
due to their extra income which can negate the extra income
and even result in less disposable income!

16. Arguments for the £7 per hour minimum wage
4. Reduction of male-female pay differentials.
Analysis: Male-female wage differentials are reduced, as a
substantial proportion of those on low pay who benefit from the
NMW and increases are female.
Evaluation: Of course this doesn’t address the issue of gender pay
discrimination as shown recently:

17. Arguments for the £7 per hour minimum wage
5…. in the case of a monopsony employer ie NHS
Analysis: A minimum wage can help to counter the power of a
monopsonist employer. In this case the NMW could both increase
wages and save jobs.
The framework for analysis is the same as that for analysing the
impact of a trade union in a monopsonistic labour market.

18. However...a key counter argument to the NMW
is……..
Higher wage costs may filter through…..
Analysis: If the minimum wage adds to the cost of production,
then UK goods become more expensive causing cost push
inflation which hits living standards if they are necessities and
also reduces UK competitiveness
Evaluation:
• Bosses should push for compensating rises in productivity to
offset this problem
• In many areas, the UK is unable to compete on price and to do
so by the rationale above would mean paying poverty wages

19. So…..a reasoned conclusion
That’s your call………..!! But:
1. Don’t repeat
2. Don’t sit on the fence
3. Answer the question
My view is that there is little evidence to suggest that the NMW has
resulted in real wage/classical unemployment and as such the
incentive and income effects more than justify its introduction and it
increasing above the rate of inflation and of benefits growth. As
such, I think we should be proud of it.
………………….But you may disagree!!

20. Synoptic answers
Although this question relates to the labour market – it is
an example of a government intervention that has wider
economic effects – try to include some of these in your
answer.
A2 exams are synoptic so, do use AS (unit 1) concepts such
as
– Elasticity
– Consumer and producer surplus
– Externalities and welfare losses/gains

21. Get help from fellow
students, teachers and
tutor2u on Twitter:
#econ3
@tutor2u_econ
www.tutor2u.net