In 1999 the Labour government introduced a national minimum wage (NMW) with the objective of reducing poverty. In 2015, George Osborne’s final Budget as chancellor replaced this with a national living wage (NLW), which aimed to ‘give Britain a pay rise’ in an era of austerity. While these policies have been broadly welcomed, particularly by those who have seen their incomes stagnate in recent years, they have received mixed reactions from economists.
A minimum wage is, in effect, a price floor for the labour market. We typically think of firms demanding a given quantity of labour and workers supplying a given quantity of labour at each price. Figure 1 depicts this relationship, and the unambiguous effect that introducing a minimum wage has on employment.
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