A National MinimumWage (NMW) was introduced in the UK in 1999 and is currently £7.50 for ages 25and over, a 4.2% increase compared to 2016 (GOV.UK, 2017). Job SeekersAllowance (JSA) is the main unemployment benefit in the UK. It is a fortnightlypayment of up to £73.10 for those who are aged 25 and over to people activelyseeking employment.
The aim of the NMW and JSA is to positively affectlow-income households; they encourage employment but there is also a risk manymay become dependent on it. A NMW is a legally enforced price floorset by the government and ensures individuals are paid a sufficient wage tolive on. An equity-fairer society is achieved as government intervention intothe labour market promotes income redistribution and a compression of thegender pay gap. In 1998, the pay gap was 16.4% and fell to 10.8% by 2006; it isplausible the NMW made a significant contribution to this (Metcalf, 2008).
Figure1 shows those who earned a low-income before the establishment of the NMW wouldreceive higher incomes. This would shift the demand curve for normal goods fromQ to Q1; consumers can afford more goods at P, which increases their standardof living. Furthermore, Figure 2 demostratesthat a recipient of the NMW would see an annual increase in wages.
This causestheir budget constraint to shift to the right, resulting in the consumer being ableto purchase more goods at the given price, shifting the indifference curve tothe right. This results in an overal increase in ulitily which indicates low-incomehouseholds will be able to enjoy a better quality of life. From the income-consumptiongraph, we can see there is a positive income elasticity of demand (normal goods)which leads to the positive engel curve (Figure 3).
This also shows an increasein income can increase the amount of goods purchased, which increases the standardsof living for low-income households.