Government Intervention: Labour Market (Edexcel IGCSE Economics)
Revision Note
Written by: Steve Vorster
Reviewed by: Jenna Quinn
Reasons for a National Minimum Wage
Government's often intervene in the labour market by setting a minimum wage
A minimum wage is a legally imposed wage level that employers must pay their workers
It is set above the market rate
The minimum wage/hour often varies based on age
The aim is to improve equity and avoid the exploitation of workers
It protects low income earners as it ensures workers receive a fair wage, supporting their basic needs
This protection is likely to impact workers in lower-paid sectors
These sectors include retail, hospitality and agriculture industries
A higher minimum wage can act as an incentive for workers to supply labour
More workers are prepared to supply themselves to the market for work
Workers may have improved productivity as they feel more motivated to work with higher wages
National Minimum Wage Diagram
Australia set the national minimum wage at $23.23 per hour in 2024
This is above the market wage rate
Diagram analysis
The market equilibrium wage and quantity for truck drivers in Australia is at WeQe
The government imposes a national minimum wage (NMW) at W1
Incentivised by higher wages, the supply of labour increases from Qe to Qs
Facing higher production costs, the demand for labour by firms decreases from Qe to Qd
This means that at a wage rate of W1 there is excess supply of labour and the potential for unemployment is equal to QdQs
Increasing the minimum wage level
Should a country decide to increase the minimum wage, it will further distort the market, resulting in an increase in the excess supply of labour
Diagram analysis
With the original minimum wage set at W1, the excess supply of labour in the market is equal to Qs1-Qd1
An increase in the minimum wage to W2 has the following effects:
The quantity of labour demanded by firms contracts from Qd1 to Qd2
The quantity of labour supplied by workers extends from Qs1 to Qs2
There is an even greater excess supply of labour (unemployment) equal to Qs2-Qd2
Evaluation of a National Minimum Wage
A minimum wage can be controversial, as it has different impacts on stakeholders
Evaluating the use of minimum wages
Advantages | Disadvantages |
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Examiner Tips and Tricks
When evaluating the use of minimum wages, do not assume that they will automatically increase unemployment. Question that assumption.
Many studies have shown that unemployment does not increase, and in some instances, employment increases. This is because some workers are receiving higher wages and choosing to consume more. This increases total demand in the economy, which in turn increases the demand for labour by firms, thus reducing/eliminating any potential unemployment.
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