Exam Frequency Analysis
Past paper frequency (2018 to 2024)
This topic accounts for approximately 8% of your exam marks.
stable
Low
Stable8%
Wage determinants, minimum wage effects, and trade union impact appear regularly in Section B; typically 6 to 10 marks.
A national minimum wage is a legally imposed floor on wages: the lowest hourly rate at which an employer can lawfully pay a worker.
How it works on a labour-market diagram
If the NMW is set above the free-market equilibrium We, two things happen:
- Quantity of labour supplied rises (more workers want the higher-paid jobs). Movement up the SL curve.
- Quantity of labour demanded falls (firms hire fewer workers because labour is more expensive). Movement up the DL curve.
The result is excess supply of labour at the NMW: more workers want to work at this wage than firms want to hire. The gap is unemployment caused by the minimum wage.
If the NMW is set at or below the equilibrium, it has no effect on employment (it is non-binding). For it to bite, the legal minimum must be above what the free market would have set.
Advantages and disadvantages
| Advantages | Disadvantages |
|---|---|
| Raises pay of the lowest-paid workers, reducing in-work poverty | If set above equilibrium, can cause unemployment among low-skilled workers |
| Reduces wage exploitation in vulnerable industries | Raises firms' production costs, which may be passed on as higher consumer prices |
| Reduces wage discrimination (everyone gets at least the minimum regardless of gender/age) | Small firms may struggle to absorb higher wage costs and may close |
| Higher incomes for low-paid workers can boost consumer spending and aggregate demand | May encourage firms to substitute capital (machines) for labour |
| Often varies by age, recognising the lower productivity of younger workers | Hard to enforce in informal sectors where workers are paid cash-in-hand |
Why the effects depend on context
Several factors affect how big the unemployment effect actually is.
- Where the NMW sits relative to equilibrium. A small lift above
Wehas a small effect; a large lift has a big one. - Price elasticity of demand for labour. Inelastic labour demand (where workers cannot easily be replaced by machines or imports) leads to small employment losses for any given wage rise.
- Price elasticity of supply of labour. If supply is elastic (many workers ready to step in), the surplus is large.
- Whether firms can pass costs on. In competitive consumer markets, firms may absorb the higher wage rather than raise prices; in markets where they can pass it on, the customer pays.