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Labour Market Coursework

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Labour market policy coursework
It has been suggested that lowering the UK’s statutory minimum wage would reduce unemployment and “get Britain working”.
Discuss the merits of this statement referring to appropriate academic research/evidence.
The national minimum wage (NMW) introduced in 1999 is the minimum amount the government expects employers to pay their employees per hour at work. At the present time (2012) the UK’s NMW is £6.19 per hour for employees over the age of 21 years. It sets a price floor in order to balance out the fairness of the work carried out and to ensure there is pay equality between staff.
Unemployment involves people who are not currently in a job but are actively looking for work. There has been a high amount of unemployment in the UK with % of people out of work.
It has been suggested that there is a link between the NWM and unemployment levels. This is that lowering the NMW would lead to more employment and get people into work. This is on the basis that the NMW is fixed under the equilibrium wage which labour supply and labour demand meet. However with the NMW posed over this equilibrium this leads to a decrease in employment.

The graph (Smith 2003) shows that if the NMW is above the equilibrium then there is a surplus of labour demand. This is because firms decrease employment and demand for labour increases. Therefore, lowering the NMW below the equilibrium would lead to an increase in demand for labour with firms hiring more employees and so decreasing unemployment levels.
The link between wages and unemployment can be explained using the scale and substitution effects. The scale affect occurs when employee wages are reduced and this then urges the organisation to grow and expand so employing more employees. The substitution effect occurs when employees’ wages are reduced and the firm then take on a more labour

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