First 343 words of the document:
Policies to reduce Labour Market Failure - F583
Labour Market Failure: A surplus or shortage of labour. Market forces of
demand and supply do not result in efficient allocation of labour resources.
Arguments in favour Arguments against
Increases standard of living for poorest and most
Hits small businesses harder than large businesses
vulnerable class in society
Businesses try to compensate by raising prices of
Motivates and encourages workers goods - leading to inflation and the cost of goods and
Decreases cost of govt. spending on social welfare Previously higher earners may simply be paid at the
by increasing incomes of those lowest-paid minimum wage instead
Limits freedom of employers and employees, and can
Stimulates consumption; increase AD
exclude certain groups from the labour force
Does not have a substantial effect on
Those who may have been paid lower than min. wage
unemployment in comparison to other economic
may now be unemployed
factors, so no extra pressure on welfare systems
How does a national minimum wage effect an economy?
Wages A higher minimum wage increases the wage rates of
unskilled workers above the market equilibrium wage,
SL the quantity of unskilled workers employed will fall (Q1
Wage Market Wage
Some workers, usually those whose wages were closer
to the minimum, will enjoy an increase in their wages.
Others, particularly those whose wages were much
lower than the minimum, will now be unable to find work
- pushed into unemployment or out of the labour force.
As the diagram shows, the minimum wage acts as a
price floor and should therefore cause unemployment.
This is because a greater number of people are willing
Q2 Q1 Q3 Employment to work at the higher wage whilst a smaller number of
Unemployment jobs will be available at the higher wage.