Question

Discuss the impact of an increase in the National Living Wage on employees and employers.

Themes:

AD and AS

Capital-Labour Substitution

Labour Productivity

Labour market

Unemployment

Labour Demand and Supply

Skills

Multiplier

Answer 1

AD and AS

• Both AD and AS would experience rises. Increase in wage would increase purchasing power of people, thereby leading to rise in AD. Rise in AD would incentivize producers to supply more output. Hence, AS shall increase.

Capital-Labour Substitution

• Since, now hiring labor would become costly due to rise in living wage. Thus, producers are likely to substitute capital for labor. Demand for labor will go down.

Labour Productivity

• Labor productivity will rise. Now labors would be incentivized to work intensively and extensively. Thus, labor productivity increases.

Labour market

• Labor market is likely to develop more after setting higher wages.

Unemployment

• There may be negative implication for employment opportunities. It will increase labor costs, thus producers would be less inclined to higher more labors.

Labour Demand and Supply

• Labor demand is likely to fall while supply would rise up due to lucrative nature of jobs.

Skills

• Labor will try to increase its skills by investing more in education and trainings.

Multiplier

• Value of multiplier depends on marginal propensity to consume (MPC), hence increase in income of labor will cause rise in MPC thereby leading to value of multiplier.