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Will there be a 'watering down' of the National Living Wage?

Jonny Clark

7th September 2016

This year's Year 2 students looking at wage determination as part of their Labour Economics sessions are well to be reminded that the UK uses a 'National Living Wage' title rather than 'Minimum wage'. The policy has an ambition of reaching 60% of the average wage rate within the next 5 years. To achieve this there would need to be a constant increase in the set wage (currently at £7.20 for people over 25 years old).

A think tank called the 'Resolution Foundation' are urging the Government to stick with this policy in the wake of requests by some businesses to slow down the increase over the coming years. The business concern is that such increases in wages leads to reduced profits, potential closures or the need to lay off 'expensive' staff. Added to this, is the concern that wage increases get passed on to consumers with increased prices (leading to inflation).

The counter argument from the Foundation is that the NLW addresses equity concerns as it impacts most on people who already have low pay. This has a 'ripple effect' of increasing aggregate demand in the economy.

The diagram below may be useful to those thinking about the impact of the NLW. It shows how an increase in basic pay will increase the supply of labour as workers are encouraged to work more (either longer hours or to come out of voluntary unemployment) whilst reducing the demand for labour from business organisations.

You can download this diagram in editable format from the Powerpoint slide here.

Jonny Clark

Jon Clark has been teaching economics and business studies for over 25 years primarily in the Further Education sector. Before joining tutor2u, he was a senior manager at South Cheshire College in Crewe.

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