Does Raising the Minimum Wage Cause Unemployment?
Does raising the minimum wage cause unemployment? Learn when jobs may fall, why monopsony can change the result, and what to explain in A Level Economics.
No. Raising the minimum wage can cause unemployment, but it does not always do so. The outcome depends on the wage set and how the labour market works.
Syllabus focus: This covers the minimum wage element of AS Level 3.3.4 (Addressing income and wealth inequality). The explanation of monopsony draws on part of A Level 8.3.8 (Labour market forces and government intervention). It does not cover every policy in those syllabus points.
Why might jobs be lost?
A minimum wage is the lowest wage an employer is permitted to pay. In a competitive labour market, if it is set above the wage that would otherwise be paid, more people may want to work while firms may want to employ fewer workers. This creates an excess supply of labour: people willing to work who cannot find jobs at that wage.
How many jobs are affected depends partly on the elasticity of demand for labour: how strongly firms change employment when wages change. If firms cannot easily reduce staffing or replace workers with machines, the fall in employment may be small.
Why might employment stay the same or rise?
Some employers have monopsony power, meaning they have significant influence over the wages they pay because workers have limited alternative employers. In this case, a carefully set minimum wage can raise pay without reducing employment and may even increase it. Higher pay might also reduce staff turnover, helping firms offset some of the extra wage cost.
Exam mistake to avoid: Do not write that a higher minimum wage must cause unemployment. Explain whether the new wage is above the existing wage, consider how responsive firms are to higher labour costs, and distinguish a competitive labour market from one with monopsony power.
