Labour Market

Labour Market

1. Government Intervention in the Labour Market

   • The national minimum wage(NMW) is a method of narrowing wage differentials. It is a minimum price for labour, currently set at £6.50 p/h for adult workers. The NMW makes it illegal to supply or hire labour for less than this rate therefore helping to narrow wage differentials between those who would otherwise have been paid less and those higher up the income scale.
     • Potential to cause unemployment, profit maximising firm only employs those workers who had more to the revenue of the company than to its costs. NMW will no longer be the case since it will raise wages above MRP of some workers, the NMW will cause a contraction of labour demand. The resultant unemployment may be greater because NMW also encourages an extension of labour supply by making work more attractive compared to leisure
       • Prevents achievement of reducing wage differentials, this would alleviate poverty. Those made unemployed are more likely to be in poverty than had they been in low paid work and won't be gaining experience in the workplace which would make them more attractive to employers in the future.
         • NMW may contribute to youth unemployment since future employment chances of young workers are damaged if the do not gain experience in their first years in the labour force. Therefore, a 'development rate' of the NMW applies to 18-21 year olds and a lower rate to 16-17 year olds.
     • When NMW first employed in 1999, little evidence of it causing unemployment. Unemployment continued to fall against the background of a growing economy.
       • The extent to which NMW causes unemployment will depend on how high above it sits in relation to the market clearing rate. In reality, such a wage rate will vary not only among industries but also among regions of the UK. Therefore making it very difficult to assess the full impact on unemployment.
   • Price Ceilings on Higher Wages may be a better way of narrowing wage differentials than the NMW. If gap between high and low earners is considered to be a bigger problem than low pay, then it would be possible in theory to take measures to limit the pay of high income earners, such as putting pay ceilings.
     • In practice, it is highly unlikely that such a measure could be workable in the integrated global economy. UK firms would struggle to attract highly qualified and skilled workers if they could not offer pay rates comparable to firms in other countries.
       • The signalling and incentive functions of wages would be suppressed as workers could not be rewarded beyond a certain pay rate for taking positions of responsibility. This could result in significant labour shortages in some occupations. Such factors would provide reasons for firms not to locate in the UK and would be extremely damaging for the UK economy.