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Is the impact of increasing the National Minimum Wage positive or negative among firms and workers?

 The National Minimum Wage(NMW) is a statutory minimum wage used to increase the earnings of the low-paid. The National Living Wage, the NMW for those aged 23 and over, is at £8.91 per hour.

Increasing the NMW would mean workers receive increased real disposable income. As wages are the reward to labour for working, there would be an increased supply of labour. It would improve the monetary benefit from the job, which could mean workers would choose to work more productively. As labour per hour increases, this makes them more valuable to an employer. As a result, there is increased demand for labour from firms, given that productive workers are in more demand according to labour market theory. This is beneficial to both firms and workers, as workers experience a greater quality of life due to increased income and firms see increased marginal revenue product of labour, despite the increased costs from the higher NMW. 

However, this may not necessarily occur. The diagram shows the short-run labour supply curve, where as the wage rate increases, workers would be conflicted on whether to spend more time on work over leisure (substitution effect) or vice versa (income effect). As wages continue to rise, the income effect starts to outweigh the substitution effect, causing a reduction in the quantity of labour supplied. Therefore, productivity does not actually rise, and there is only a greater rise in average costs for firms.


 

Increasing the NMW is likely to have detrimental effects. A NMW is always set above the free market wage rate to ensure workers get a fair wage. However, this can mean that the supply of labour is in excess, becuase workers are now willing and able to supply labour at a much larger quantity than firms demand. As a result, increasing the NMW would only result in real wage unemployment. Implementing the NMW intends to reduce the inequitable distribution of income, as low income groups, particularly those on zero-hour contracts would receive a fairer wage rate. But if it is to have such unintended consequences, it would not be an appropriate decision to make. 

Having said that, there is little empirical evidence to suggest this. Rising wages tends to mean that workers, as consumers, would increase their demand for goods and services due to higher affordability. The derived demand for labour would actually increase as more labour is now needed to produce the increased output to meet the demand. This means firms may choose to increase their scale of operation, and for this they would increase their employment. The excess supply of labour mentioned above would not necessarily occur - it would only work if ceteris paribus holds. 

On balance, whether or not the increase in the NMW would impact firms and workers depends upon the percentage of the population part of the labour force and their income levels. Realistically, most firms would tend to pay higher than the the NMW anyway, with a few exceptions being low-skilled jobs such as cleaning. A large percentage of the population tends to work on fixed salaries, so it is difficult to substitute work and leisure to a very large extent considering that it is compulsory to work a certain number of hours a day. Increasing it would, however, guarantee a certain wage that allows individuals to come out of the poverty trap and reduce voluntary unemployment. In terms of firms, it would depend on their size, and their ability to hire and fire workers. Therefore, I believe increasing the NMW would be beneficial to firms and workers, in most circumstances. 

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