A National Minimum
Wage (NMW) was introduced in the UK in 1999 and is currently £7.50 for ages 25
and over, a 4.2% increase compared to 2016 (GOV.UK, 2017). Job Seekers
Allowance (JSA) is the main unemployment benefit in the UK. It is a fortnightly
payment of up to £73.10 for those who are aged 25 and over to people actively
seeking employment. The aim of the NMW and JSA is to positively affect
low-income households; they encourage employment but there is also a risk many
may become dependent on it.

A NMW is a legally enforced price floor
set by the government and ensures individuals are paid a sufficient wage to
live on. An equity-fairer society is achieved as government intervention into
the labour market promotes income redistribution and a compression of the
gender pay gap. In 1998, the pay gap was 16.4% and fell to 10.8% by 2006; it is
plausible the NMW made a significant contribution to this (Metcalf, 2008). Figure
1 shows those who earned a low-income before the establishment of the NMW would
receive higher incomes. This would shift the demand curve for normal goods from
Q to Q1; consumers can afford more goods at P, which increases their standard
of living. Furthermore, Figure 2 demostrates
that a recipient of the NMW would see an annual increase in wages. This causes
their budget constraint to shift to the right, resulting in the consumer being able
to purchase more goods at the given price, shifting the indifference curve to
the right. This results in an overal increase in ulitily which indicates low-income
households will be able to enjoy a better quality of life. From the income-consumption
graph, 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 increase
in income can increase the amount of goods purchased, which increases the standards
of living for low-income households.


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