David Metcalf has concluded that the implementation of the minimum wage appears to have had no negative impact upon Employment. Critically examine the possible explanations for this outcome.
The minimum wage was implemented and became law on the 1st April 1999 this helped prevent unfair low pay and “levelled the playing field” (http://www.businesslink.gov.uk/bdotg/action/layer?topicId=1074402393) for employers as companies could compete on quality of goods rather than setting a reduced price based on low pay. It applies to most workers and sets hourly rates below where pay is not allowed to decrease; these rates are recommended by the Low Pay Commission (LPC). At first the adult rate was set at £3.60 per hour for adults in the first 6 months of their job with sufficient training, there was also a lower youth rate of £3.00 per hour for those aged 18 – 21.(Stuart p5) Presently the minimum wage stands at £5.52 per hour for ages 22 and over and £4.60 aged 18-21. (http://www.is4profit.com/business-advice/employment/minimum-wage-and-statutory-pay-obligations_2.html). Neo-classical economic analysis suggests that an individuals wage should equal their marginal product of labour, “as wages constitute the individuals reward for their personal contribution to output of a firm” which resembles that of perfect competition. ( Forth & O’Mahoney p4) The implementation of a minimum wage leads to a rise in wage rates for those that were previously paid unfairly which theoretically has a positive impact on employment. Therefore workers that previously got paid below the minimum wage will likely surpass their marginal product.
Figure 1 illustrates the impact of the implementation of a minimum wage, the model assumes a competitive market where homogenous wo ...