National Minimum Wage


What is National Minimum Wage?

minimum amount of compensation an employee must receive for performing labor.

Reasons for a Minimum Wage

Reduce poverty

The minimum wage increases the wages of the lowest paid. These workers will have increased income and will reduce relative poverty.

Increase productivity

The efficient wage theory states that higher wages can increase
the incentive for people to work harder and thus higher wages may increase labour productivity. If firms have to pay higher wages, they may put more focus on increasing labour productivity, which increases efficiency of the economy

Increase the incentives to accept a job.

With a minimum wage, there is a bigger difference between the level of benefits and the income from employment. A minimum wage could also increase the participation rate as the benefits of work become greater and more worthwhile.

Disadvantages of National Minimum Wage


If labour markets are competitive a minimum wage could cause unemployment because firms will demand less labour, and higher wages may encourage more workers to supply their labour.

Cost Push Inflation

A minimum wages can cause cost push inflation. This is because firms face an increase in costs which are likely to be passed on to consumers. This is even more likely if wage differentials are maintained.

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Fig. 1 A national minimum wage causing unemployment

NMW raising the wage rate from W to W1 but causing unemployment since the supply of people wanting to work at this wage rate exceeds demand for worker's labour.
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Fig. 2 A national minimum wage with rising employment.

Paying a higher wage to workers will rise their motivation and hence their productivity

Supply and Demand for Labour

The Demand for Labour

  • There is an inverse relationship between the demand for labour and the wage rate that a business needs to pay as they take on more workers
  • If the wage rate is high, it is more costly to hire extra employees
  • When wages are lower, labour becomes relatively cheaper.A fall in the wage rate lead to an expansion in labour demand.

The Supply for Labour

  • It is the number of workers willing and able to work in a particular job or industry for a given wage
  • The labour supply curve for any industry or occupation will be upward sloping. This is because, as wages rise, other workers enter this industry attracted by the incentive of higher rewards. They may have moved from other industries or they may not have previously held a job, such as housewives or the unemployed
  • The extent to which a rise in the prevailing wage or salary in an occupation leads to an expansion in the supply of labour.
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Assuming labour markets are competitive and that a minimum wage does cause lower employment, the most likely outcome is a negative impact on total demand. People who become unemployed would spend less, leading to lower total demand.

As shown in the graph, above the equilibrium wage, you would expect a fall in demand for labour (Q1 to Q2) and therefore, there would be excess supply of labour (Q3-Q1)