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Impact Of National Minimum Wage In The Uk Economics Essay

n this report I examine the impact of the NMW on the labour market outcomes of young people. There are other types of impacts of the NMW, such as, on the retail sector, on the fast food, restaurant and pub sector, on housing and social care sector, on the leisure sector, on the childcare sector, on the hotels sector. I am going to exploit the fact that individuals receive a legislated increase in the NMW at age 22. I use data from the labour force survey pooled over the year April 1999 to October 2010 to examine changing labour market outcomes as individuals turn 22. My focus is on employment outcomes of earnings of individuals, but I also found the impact on unemployment and inactivity based on demand and supply of labour.

Before I explain my research, I want to give short explanation about NMW. The National Minimum Wage (NMW) is a minimum amount per hour that most workers in the UK are entitled to be paid. NMW was introduced in April 1999 by the low pay commission.  It covers almost all workers in the UK. There are currently three different national minimum wage rates and an apprentice rate, which are usually updated in October each year. The rates that apply from 1 October 2010 are as follows:

for workers aged 21 years or more: £5.93 per hour

for workers aged 18 to 20 inclusive: £4.92 per hour

for workers aged under 18 (but above compulsory school age): £3.64 per hour

for apprentices aged under 19: £2.50 per hour

for apprentices aged 19 and over, but in the first year of their apprenticeship: £2.50 per hour

Apprentices aged 19 or over who have completed at least one year of their apprenticeship are entitled to receive the full national minimum wage rate applicable to their age.

Basis on historical data, figure shows us positive linear trend of the NMW ratings from 1999-2010.

The adult National Minimum Wage, 1999-2010

Basis on these rates I prepared table on the historical rates of NMW.

Table 1: Historical Rates

Adult Rate

(for workers aged 22+

until 2010 when this

rate applied to those aged 21+)

Development Rate

(for workers aged 18-21)

Apr 1999



Oct 2000



Oct 2001



Oct 2002



Oct 2003



Oct 2004



Oct 2005



Oct 2006



Oct 2007



Oct 2008



Oct 2009



Oct 2010




Since the NMW was introduced in April 1999 a substances of the reports has emerged looking at its impact on the labour market. The main focus of this research has been the impact on employment from which appear from the NMW ratings. However, determining the impact of the National minimum wage on employment is a difficult exercise. Because the minimum wage is national and there are no sizeable groups who are excluded from coverage, finding a suitable control group with which to compare employment outcomes is difficult. The previous studies exist tend to compare group that are more or less affected by the minimum wage.

In this report I use to approach to estimate the impact on labour market outcomes among young workers at age 22. Table 1 show that the adult rate is about 18-20% higher than the development rate. My approach contrasts with the differential impact approach in that identification of the employment impact arises from the existence of different minimum rates for very similar individuals, those just a few months older or younger than 22 years. Based on that effect of this legislated wage increase on various labour market outcomes for those turning 22 are employment, unemployment and inactivity. I focus largely on low skilled individuals since they are the group most likely to be affected by the NMW.

I find a significant increase in the employment rate of low skilled workers at age 22 of about 5%. The effect is slightly larger for low skilled women, whose employment rate appears to increase by 6%.  We can find no such increase in the years preceding the introduction of the NMW, or at age 21 or 23.  We also find evidence that reductions in unemployment and inactivity account for about two and three fifths of this employment increase respectively. It is plausible that these results are reflective of a labour supply increase at age 22 among these low skilled individuals in response to a 20% increase in the wage on offer.

Wages and the NMW at 22

Basic idea about earnings based on different age. Table 2 shows the proportion of employee’s age 21 or less is paid less than the adult NMW. But earning data shows there are increase of earnings the age of 18- 20 than the adult. Labour force survey said that the proportion of low skilled and females is higher than adult. However that in terms of the impact on employment treatment here arises from the wage on offer to individuals.


In this section I present my results on employment. Based on table 2, there was further increase in the number and proportion of employees who were paid at minimum wage (Earning) that means the number of employee’s increases as compare to last year. Therefore the minimum wage was having an impact on an increasing number of firms and workers. Estimation of number of employee’s earnings over age 21 increase by 3.5% as compare to age between 18-20 which is 7.7% as compare of last year. So, we can say employment increases between 18-20 than the age 21 or over. And aver all increases in the employment by 3.8%. And obviously employment increases than the price was also increased which is by 4%.

Table 2: Estimated Number and Percentage of Jobs Covered by the Recommended October 2010 National Minimum Wage Up ratings, UK, 2010

October 2010 Hourly Minimum Wage Rates

Earnings Basis

Price Basis

AEI including bonuses


Adult Rate (aged 21 and over)






Youth Development Rate (18-20 year olds)






16-17 Year Old Rate












If the NMW is higher than market wage for a particular job, then demand will contract and supply extends. The contraction of demand is the result of a combined income and substitution effect in response to the higher wage rate. In other words, at a higher wage rate the firm’s income, its profits, will, ceteris paribus, fall and the firm will reduce demand, hence the income effect. The substitution effect implies that at a high wage rate firms will look to substitute workers when they can, for other workers or with capital. One reason the minimum wage is fixed for all workers is to reduce the substitution effect, and make demand for labour more inelastic.

On the supply side the higher wage will encourage existing employees to supply more labour, or it will encourage workers out of voluntary unemployment. The effect can be demonstrated in the following diagram.

For example, a minimum wage of £5.00 would create a contraction in demand to Q1, but supply would extent to Q2 as more low skilled workers are encouraged to look for work, creating unemployment of Q1 – Q2.


The advantages of a national minimum wage:

Greater equity will be achieved, and the distribution of income between the high paid and the low pay may be narrowed.

Poverty may be reduced as the low paid gain more income and the unemployed may be encouraged to join the labour market. In this case the higher wage is an incentive for individuals to supply their labour.

Less worker exploitation by labour market, who is single employers, is able to pay below the market equilibrium.

The disadvantages of a national minimum wage:

A high minimum wage can cause price inflation as firms pass on the higher wages in higher prices.

Unemployment, as demand contracts, and rising unemployment as supply extends.

The competitiveness of UK goods abroad can suffer compared with low wage economies, such as China and India.

Inward investment may be deterred, as foreign investors will look to avoid high wage economies.

The labour market may become inflexible in response to changes in the rest of the economy.

Workers and employers may be driven into the ‘unofficial’ labour market.


The all of the impacts depends upon:

The level of the minimum wage

The elasticity of demand for and supply of labour

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