Government Intervention: Labour Market (Edexcel IGCSE Economics)

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 W_eQ_e

• The government imposes a national minimum wage (NMW) at W₁

• Incentivised by higher wages, the supply of labour increases from Q_e to Q_s

• Facing higher production costs, the demand for labour by firms decreases from Q_e to Q_d

• This means that at a wage rate of W₁ there is excess supply of labour and the potential for unemployment is equal to Q_dQ_s

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 Q_s1-Q_d1

• An increase in the minimum wage to W2 has the following effects:

  • The quantity of labour demanded by firms contracts from Q_d1 to Q_d2

  • The quantity of labour supplied by workers extends from Q_s1 to Q_s2

  • There is an even greater excess supply of labour (unemployment) equal to Q_s2-Q_d2

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