UK Economy - Policy Focus - Minimum Wages and Unemployment
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Last updated 24 Jun 2021
Here is a short revision video looking at whether a rise in the minimum wage will inevitably lead to an increase in the unemployment rate.
Chain of reasoning: minimum wages & unemployment
- A higher minimum wage will, other factors remaining constant, lead to an increase in labour costs for many businesses. Examples might be labour-intensive firms operating in tourism & hospitality or in the health & social care sector.
- If a firm is unable to raise their prices, higher costs will then cause a fall in their operating profits. This might lead some firms to reduce employment levels perhaps by replacing some labour with new technology.
- In this way, a higher minimum wage could lead to falling demand for labour and hence a rising unemployment rate.
- If employers cut hours instead of jobs, this can cause a rise in underemployment.
Evaluation: Will a higher minimum wage cost jobs?
- Other costs might have fallen – for example a reduction in rents and business rates in the retail sector, or lower national insurance can help to offset a minimum wage rise.
- A higher minimum wage increases the disposable incomes of those affected – they will spend more, adding to aggregate demand thus generating increased employment.
- Higher minimum wages might stimulate labour productivity which can then help to control unit labour costs for a business. Employers may improve their training schemes.
- Much depends on the scale of a minimum wage rise (contrast a 2% increase in the pay floor with a 10% jump) and also depends on the wage elasticity of demand for labour.