Evaluate three labour market factors

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Evaluate three labour market factors which might explain why levels of employment have risen despite increases in the national minimum wage. Business concern about the government’s minimum wage is increasing thanks to an unlikely alliance of hairdressers, hoteliers and fish friers. The national hourly rate for adults over 21 was increased from 20 to 4.50, the fourth upward adjustment since the measure was proposed by the incoming Labour government in 1997. It is predicted that it will soon rise to over 5. However, most economic studies have shown little, if any, negative impact on job creation.

But the smooth ride enjoyed by the government may be coming to an end as a growing number of smaller employers and industries in poorer parts of the country begin to voice opposition to further increases. Stephen Alambritis, of the Federation of Small Businesses, says his members are worried that any economic downturn could worsen the problem and would like to see more consideration of regional economic variations.

One industry which has faced problems is hairdressing, which is traditionally one of the lowest-paid occupations in the country. Thousands of low-paid employees have benefited from the minimum wage, but smaller salons fear they cannot continue to meet wage increases. Ray Seymour, general secretary of the National Hairdressers’ Federation, said a particular worry is the Low Pay Commission’s proposal to extend wage controls to trainees under the age of 18.

Research by the Organisation for Economic Co-operation and Development suggests that workers in their teenage years and early twenties have seen their job prospects suffer where the minimum wage has been set too high. In Spain employment was hit when the adult rate was extended to 16-year-olds. Other commentators warn that the minimum wage is encouraging some businesses to break the law.

Some people told us in 1999 that the introduction of a minimum wage would inevitably cost jobs. In fact the minimum wage has been increased four times since then and, contrary to their predictions, one and a half million more people are employed. The only conclusion that can be drawn is that employers have been able to afford to pay more than they have chosen to.

The notion of regional variations to the minimum wage is a complete non-starter. This was fully considered five years ago by the Low Pay Commission and rejected. The truth is that the low paid are quite evenly spread across the UK, and the use of regional rates would seriously undermine enforcement efforts.

If the NWM is below equilibrium then the NWM will have a minimal effect on employment levels. If any further rises are also below free-market equilibrium, such then this would also have no effect (assuming the elasticises are correct). This can be demonstrated as none of the UK cities have their average wage below the minimum wage, however this is only an average, and doesn’t give any indication of the lowest earners. All of this also depends on the elasticities of supply, i.e. whether the worker is skilled or unskilled.

For example, those who work in the tills in supermarkets are generally unskilled, anyone with a small amount of training can take their jobs, which means that the wage prices are price elastic. On the other hand, a brain surgeon cannot be replaced by anyone with a small amount of training, there are several hoops to jump through and therefore their wages are almost perfectly inelastic (or very price inelastic).

Economic growth and inflation may have something to do with why there has been little unemployment since the introduction of the NMW. If inflation is 10% (hypothetically), then the average pay will raise way above 1% anyway. Therefore, raising the NMW by 1% will have little to no effect on the economy. However, this does assume that inflation is high, but as current statistics how, this is not necessarily the case. RPI has fallen to 0%, with CPI measure at 3%. Without additional statistics of inflation levels at the time of the question, it is difficult to judge whether or not this was the primary cause.

Productivity can also have increased over the longer term, meaning that workers could demand higher wages, and employers would be willing to may them extra as they are adding greater value to the business (MRP). However, there is only so far that productivity rises can go, and a lot of workers who are already productive would quite possibly be already earning higher than the NMW.

Having said all this, it may be only a matter of time before the effects are really felt. As quoted by Stephen Alambritis (FSB), if a downturn comes, firms may be unable to sufficiently cut costs and may be forced to make redundancies. Again, due to the economy being a lagged indicator, it is difficult to tell at this stage.

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