Minimum wage set to rise but 18-20 year-olds will not get bigger increase
Real-world example for IB, A-Level, AP and IGCSE Economics essays: Wages and income inequality, Unemployment and the labour market, Taxes, subsidies and price controls
What happened
The Chancellor, John Healey, will announce new minimum wage rates in the Budget; the minimum wage is set to rise, but 18-20 year-olds will not receive a larger increase. He also announced measures to help households with the cost of living.
The economics
Raising the minimum wage lifts pay for low-income workers and is an example of direct government intervention in the labour market affecting wage distribution. Students can draw a labour market diagram: when the minimum wage is above the equilibrium wage, low-paid workers earn more, but firms face higher labour costs and may reduce demand for young or low-skilled workers. The smaller increase for 18-20 year-olds shows the trade-off between raising pay and protecting youth employment.
Figures to quote
- 18-20 year-olds
Evaluation
A higher minimum wage can raise incomes for some workers, but it may raise firms' costs and reduce hiring, especially for young people; the long-run effect also depends on whether firms can absorb costs through higher prices or productivity gains.
Practice question
Using this example, analyse the likely effects of a government raising the minimum wage on wage levels and employment in the labour market.
Read the article ↗ · Draw the diagram in the Diagram Lab
Where it fits in the syllabus
- Wages and income inequality: How labour markets set wages, and how income and wealth are shared across people.
- Unemployment and the labour market: People willing to work who cannot find a job; it can be cyclical, structural or frictional.
- Taxes, subsidies and price controls: Indirect taxes, subsidies and maximum or minimum prices that governments use to change market outcomes.
- IB Economics: Aggregate Demand and Supply, Measuring Economic Activity, Government Intervention and Market Failure
- A-Level Economics: Macroeconomic Objectives, Government Microeconomic Intervention
- AP Macroeconomics: Economic Indicators and Business Cycle
- AP Microeconomics: Factor Markets and Income Distribution, Supply, Demand and Market Equilibrium, Market Failure and the Role of Government
- IGCSE Economics: The Allocation of Resources, Macroeconomic Objectives, Government Intervention