The National Living Wage has risen by 2.2% to £8.91, meaning 23-year olds+ will pocket an additional £345 for full-time employees, a noticeable increase.
23-year olds and above will especially benefit from this decision, mainly since this age group will either have children to take care of or are in education such as University.
So, although a 2.2% increase may seem low, workers who are already paid the National Living Wage will see a proportionately larger increase due to their already limited incomes.
The reason why their incomes may be seen as low compared to other sectors in the economy is that the supply of labour for work which offers the National Living Wage typically has a large supply of labour, hence forcing wages to be low.
However, due to the UK having a National Minimum/Living Wage, the labour market does not necessarily abide by this rule.
This is because a National Minimum or Living Wage creates disequilibrium within the labour market, without a minimum wage, employers can employ anyone who wants to work at a specific wage.
This means if someone who has little to no qualifications wanted work, they could likely find it as employers would be able to pay them a much lower wage due as the person is at higher risk for the company.
However, a minimum wage forces employers to pay both risky and qualified candidates the same rates, and employers will likely favour the qualified candidates.
So, a minimum wage makes it so that employers cannot employ as many people as their labour costs go up, hence, the quantity demanded labour is limited.
But, an increasing minimum/living wage results in more people wanting to work in that specific industries, consequently, the quantity supplied of labour is increased.
The combination of these two factors results in disequilibrium within the labour market, loads of people want to work in a specific industry, but a minimum/living wage means employers cant employ everyone.
Because of this, wages are sticky as they cannot go below a specific rate, resulting in unemployment as not everyone can get a job at whatever wage rate they please.
Hence, an increase in the living wage may consequently increase the unemployment rate as firms may have to fire workers to cut back on increasing labour costs.
However, firms may not necessarily do this as the opportunity cost of firing current workers and then having to replace them with a new one in future, which will require additional training hence larger costs, may not be a favourable decision for the firm to make.
Furthermore, large firms that employ many individuals, such as Amazon, who have monopsony power over the labour market, are already operating above free-market rates, hence, an increase in the living wage may not have an impact on how many workers they employ.
But what would be the impact on smaller businesses that have smaller operating budgets? Well, we cannot answer that question for sure, but, an increase in the living wage will have either a somewhat significant impact on the labour costs of these businesses or may have none at all.
For example, corner shops are small businesses, but, they only employ a small handful of individuals, so, an increase in the National Living Wage may not have a significant impact as the percentage of their operating budget spent on labour costs is already low.
So, the firms which will be impacted the most are likely firms in competitive markets with low-profit margins and large workforces.
A large workforce means that an increase in the living wage results in labour costs being proportionately larger for these firms than that of a corner-shop.
Therefore, their labour costs may increase significantly, so, to retain their profit margin and to stay competitive, these firms may have to fire workers.
Nevertheless, the increase in the living wage will help 2 million workers, meaning that 2 million more individuals within the UK will see a sizable increase in their living standards, so, even though the decision may lead to an increase in unemployment, (which is difficult to say for certain as labour markets are quite complicated) there is somewhat of a positive trade-off.
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