Key Themes: 1 National Minimum Wage

Introduction:
A price froor in the labour market was introduced as a flagship policy of New Labour under Blair in 1999. It deals with equity (fairness) issues resulting from low wages as a failure of the labour market. Geoff Riley has posted recently on the tutor2u blog related to the concept. Read this carefully then attempt the following data response based on the post

Key definitions
Equity: relates to the fairness of an outcome, thus is a normative (value judgement led) concept.
Price Floor: a restriction placed on a market preventing price droping below a certain level maintained through intervention buying (comoodities) or legislation and threat of prosecution. This protects supplier income or wages in a labour market.

Key analysis:

Excess supply is create at the NMW, in a labour market this may be thought of as unemployment. A welfare loss is also created as the market is held outside its natural equilibrium, the cost benefit approach would suggest the gains in terms of equity more than offset the losses due to unempoyment and inefficiency.

•  what level is the price floor compared to equilibrium?
• what is the elasticity of demand and supply? (supply tends to be elastic due to low skill labour)

development analysis:
negatives

• Does NMW compromise international competitiveness as we struggle against low wage manufacturers?
• Does NMW create a rigidity in the labour market which prevents the price mechanism working?

positives (both boost the demand curve for labour - diagram?)

• Does the NMW boost the productivity (effiecency wage theory) and hence the demand for labour thus leading to higher not lower levels of employment?
• Does the NMW boost income creating greater demand for goods and services thus boosting the demand for labour (derived demand)?

What other policy options to deal with equity issues are out there?

• price controls (ceilings) on expenditures eg food and rent poor households spend the greatest proportion of their income in these areas - but policy has similar implications as price floors
• progressive taxes on income are used to redisribute income and build opportunity through:
• merit good provision boosts opportunity and human capital for all (standards? and equal access??)
• social welfare safety nets protect the most vulerable or create poverty traps?

Final evaluation

• NMW was not too much of an issue in a growing economy before the credit crunch, however things have changed. The economic outlook is bleak and price floors are coming more into play as demand for labour falls. 
• Supply side themes and a return to sustainable growth ulitmately will ease the pressure on social safety nets especially in the face of austerity and benefit caps, but this outcome is complex and uncertain.