Microeconomic Decision-makers - Workers: National Minimum Wages

This section focuses on the role of workers as microeconomic decision-makers and specifically examines the impact of national minimum wages. We will explore how minimum wages affect the labour market and analyze the effects using diagrams.

Understanding the Labour Market

The labour market is where workers offer their skills and time to employers in exchange for wages. The equilibrium wage is determined by the interaction of the supply of labour (the number of workers willing to work at different wages) and the demand for labour (the number of workers employers are willing to hire at different wages).

National Minimum Wage

A national minimum wage is the lowest wage rate that an employer is legally allowed to pay their employees. It is set by the government to protect low-wage workers and ensure a basic standard of living.

Diagrams Illustrating National Minimum Wages

We will use supply and demand diagrams to illustrate the effects of a national minimum wage.

1. The Effect of a Minimum Wage on the Labour Market

A minimum wage creates a floor below which wages cannot fall. If the minimum wage is set above the market equilibrium wage, it will lead to a surplus of labour (unemployment).

Diagram Element	Description
Wages (Y-axis)	The amount of money workers receive for their labour.
Quantity of Labour (X-axis)	The number of workers willing and able to work.
Supply of Labour (S)	Represents the willingness of workers to offer their labour at different wage rates. Typically slopes upwards.
Demand for Labour (D)	Represents the willingness of employers to hire workers at different wage rates. Typically slopes downwards.
Equilibrium Wage (E1)	The wage rate where the quantity of labour supplied equals the quantity of labour demanded.
Minimum Wage (Wm)	The legally mandated lowest wage rate.
Quantity of Labour Supplied at Minimum Wage (Qsm)	The quantity of labour workers are willing to supply at the minimum wage.
Quantity of Labour Demanded at Minimum Wage (Qdm)	The quantity of labour employers are willing to demand at the minimum wage.
Unemployment	The difference between the quantity of labour supplied and the quantity of labour demanded at the minimum wage.

2. Impact on Employment

At a minimum wage above the equilibrium, the quantity of labour demanded will be less than the quantity of labour supplied. This results in:

• Unemployment: Some workers who are willing to work at the minimum wage will not find employment.
• Reduced Employment: The overall level of employment in the economy may fall.

3. Impact on Firms

Firms that are required to pay the minimum wage face increased labour costs. This can lead to:

• Reduced Profitability: Lower profits for businesses.
• Price Increases: Firms may pass on the increased labour costs to consumers through higher prices.
• Reduced Investment: Firms may be less likely to invest and expand their operations.
• Reduced Hiring: Firms may be less inclined to hire new workers.

Conclusion

National minimum wages are a tool used by governments to protect vulnerable workers. However, they can also have unintended consequences, such as increasing unemployment and reducing business activity. The effectiveness of a minimum wage policy is often debated, with different economists holding varying views on its overall impact.