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Unemployment In UK and Effect of a Wage Increase - Essay Example

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How do we measure the unemployment rate in the UK? In October 2010, the minimum wage in the UK increased from £5.80 to £5.93 per hour for workers over 21 (2.24% increase per hour). Use suitable economic analysis to examine the effect of this increase…
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Unemployment In UK and Effect of a Wage Increase
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Unemployment In UK and Effect of a Wage Increase

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In general, a minimum wage rate sets the price of hourly labour at a level that defies the ability of the market forces to determine the price of hourly labour. The legislated minimum wage, of course, is not set below the equilibrium wage rate or the wage rate in which the demand for labour is equal to the quantity of labour supplied or the hours of labour supplied. Otherwise, there would not be a need for a legislation of a minimum wage rate. Legislation on the minimum wage rate is usually above the equilibrium wage rate. At that level, however, or at the level in which the legislated minimum wage rate is higher than the equilibrium wage rate, the quantity demanded for labour or the number of hours of labour demanded is lower than the quantity of labour supplied or number of hours of labour supplied. Thus, involuntary unemployment takes place. In Baumol and Blinder discussion, the line segment AB represents the employment gap. The work of Mankiw and Gwartney et al. also supports the perspective articulated in Figure 1. Varian pointed out the wage increases can actually increase or decrease the supply of labour but Varian’s view on the matter may not be relevant because the wage increase that we are discussing pertain to the minimum wage. Baumol and Blinder pointed out, however, that research undertaken by economists David Cards and Alan Krueger in early 1992 for New Jersey and Pennsylvania reportedly did not provide support for the perspective reflected in Figure 1 because the New Jersey stores in which wages were higher produced more net hiring than their Pennsylvania counterparts whose wages are lower. Thus, even if Baumol and Blinder (2009, p. 115) articulated a conventional perspective on the impact of legislated minimum wage, the authors called for more studies. In another section of Baumol and Blinder (2009, p. 201-202), the authors viewed that an increase in the nominal increase in nominal wage at current prices lead to a leftward shift in the aggregate supply curve. This is because the marginal costs for output will increase with an increase in the minimum wage. Baumol and Blinder (2009), however, did not clarify if the economic model represented in Figure 2 will also apply to a vertical aggregate supply curve but it seems appropriate to view that it is probably the case. Thus, it is possible that a net effect of an increase in the minimum hourly wage for labour above 21 years old will be to contract the economy, assuming that increasing the minimum wage for above 21 years old will have a net effect of increasing the overall minimum hourly wage. In addition, if the Baumol and Blinder perspective (2009, p. 201-202) applies, the increase in hourly minimum wage (assuming the increase in minimum wage for labour above 21 years old will have that effect), will also lead to an increase in the price level. Of course, we are assuming here that aggregate demand is unchanged. The current world crisis has probably shifted the aggregate demand to the left and, thus, it is more likely that the contraction will not be associated to a significant increase in prices. Figure 2. Nominal wage and the aggregate supply curve Baumol and Blinde ...Download file to see next pagesRead More
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