National Minimum Wage (NMW) – Economics Revision – The Tutor Academy
National Minimum Wage (NMW) – Economics Revision – The Tutor Academy
Level: AS Levels, A Level, GCSE – Exam Boards: Edexcel, AQA, OCR, WJEC, IB, Eduqas – Economics Revision Notes
National Minimum Wage (NMW)
The National Minimum Wage is the lowest level of hourly pay that an employer is allowed to pay an employee.
The national minimum wage was introduced by the government to ensure workers were not exploited with unfair low wages. The equilibrium wage rate paid by employers at (PE, QE) was deemed to be too low for employees to sustain basic living standards.
The diagram above suggests that the implementation of a National Minimum Wage will reduce employment levels from Q1 to Q3.
With an inelastic labour demand, the demand for labour will decrease by a smaller amount in comparison to the amount the wage rate increases by
Effect of an implementation of the NMW
The NMW will increase the standard of living of the poorest and encourage people to work, due to the positive externalities it produces
Government may be able to generate greater ta revenues due to people earning a higher wage
Young people may experience a lack of experience, making it harder for them to find employment
A higher wage may decrease the competitiveness of a country globally as they cannot compete with countries which operate on lower wages
NMW Rates (2020)
These rates are for the National Living Wage and the National Minimum Wage. The rates change every April.
The NLW and NMW rates from 1 April 2022 are:
| Rate from April 2022 | Current rate (April 2021 to March 2022) | Increase | |
|---|---|---|---|
| National Living Wage | £9.50 | £8.91 | 6.6% |
| 21-22 Year Old Rate | £9.18 | £8.36 | 9.8% |
| 18-20 Year Old Rate | £6.83 | £6.56 | 4.1% |
| 16-17 Year Old Rate | £4.81 | £4.62 | 4.1% |
| Apprentice Rate | £4.81 | £4.30 | 11.9% |
| Accommodation Offset | £8.70 | £8.36 | 4.1% |
| Current rate (April 2024) | |||
|---|---|---|---|
| National Living Wage | £11.44 | ||
| 21-22 Year Old Rate | £11.44 | ||
| 18-20 Year Old Rate | £8.60 | ||
| 16-17 Year Old Rate | £6.40 | ||
| Apprentice Rate | £6.40 |
Source: gov.uk
Advantages of National Minimum Wage
- Equality – The NMW will create more equality between the rich and the poor.
- Less Welfare Benefits – The NMW will encourage those on benefits to join the labour market as they will be able to potentially earn more money.
- Less Poverty – Poverty may be reduced as low-income workers will be paid more.
- Less Labour Exploitation – Less labour exploitation through extremely low wages.
- Higher Marginal Propensity to spend – Those who are earning more will have a higher marginal propensity to spend.
Disadvantages of the National Minimum Wage
- Higher Prices and Inflation – An increase in the NMW could lead to a rise in prices being passed on to consumers leading to higher inflation.
- Unemployment – Due to an excess supply of labour over demand for labour, this could lead to unemployment.
- Less Exports – The competitiveness of UK goods and services could reduce with lower exports due to higher inflation.
- Less International Competitiveness – Foreign Direct Investment could decrease as labour wages deter new companies from investing in the UK. The UK would become less competitive than in other countries.
- Hidden Economy – Workers may have to join the hidden economy and work for lower wages.
Quick Fire Quiz – Knowledge Check
1. Define ‘National Minimum Wage’ (2 marks)
2. Using a diagram, explain the implementation of a National Minimum Wage affects the Quantity of Labour (6 marks)
3. Explain the effect that a NMW wage has on a country (4 marks)
4. Identify and explain five advantages of a National Minimum Wage (10 marks)
5. Identify and explain five disadvantages of a National Minimum Wage (10 marks)
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A Level Economics Past Papers
