The National Minimum Wage and Living Wage

The National Minimum Wage (NMW) is one of the most important labour market interventions in the UK. Introduced in 1999, it guarantees a minimum hourly rate of pay for almost all workers. Its impact on employment, poverty, and inequality has been extensively debated and researched — and the evidence has often challenged traditional economic predictions.

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History of the National Minimum Wage

Year	Event
1909	Trade Boards Act — set minimum wages in specific "sweated" industries (tailoring, box-making)
1945–1993	Wages Councils set minimum rates in various low-pay sectors
1993	Wages Councils abolished by the Conservative government
1997	Labour government elected; pledged to introduce a national minimum wage
1998	National Minimum Wage Act passed; Low Pay Commission (LPC) established
April 1999	NMW introduced: £3.60/hour for adults (21+), £3.00 for 18–20-year-olds
April 2016	National Living Wage (NLW) introduced at £7.20 for workers aged 25+
April 2021	NLW extended to workers aged 23+
April 2024	NLW extended to workers aged 21+; rate set at £11.44/hour

Key Definition: The National Minimum Wage (NMW) is the legally enforceable minimum hourly rate of pay. The National Living Wage (NLW) is the higher rate for workers aged 21 and over (since April 2024). Both are recommended by the Low Pay Commission (LPC) and set by the government.

Current Rates (April 2024)

Age Group	Hourly Rate
21 and over (NLW)	£11.44
18–20	£8.60
Under 18	£6.40
Apprentice rate	£6.40

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The Low Pay Commission (LPC)

The Low Pay Commission is an independent body established in 1997, comprising representatives of employers, workers, and independent academic experts. It was deliberately designed to be evidence-based and non-partisan, avoiding the political conflicts that had characterised earlier wage-setting bodies.

The LPC's methodology includes:

• Econometric modelling of employment effects
• Consultation with businesses and workers
• Regional visits to low-paying sectors
• Analysis of international evidence
• Consideration of macroeconomic conditions

The government sets a target for the LPC. Since 2016, the target has been for the NLW to reach two-thirds of median hourly earnings by 2024. The October 2024 rate of £11.44 approximately achieves this target.

Exam Tip: The LPC is an excellent example of evidence-based policymaking. Examiners reward candidates who can explain how the NMW rate is determined, not just what it is. Mentioning the LPC's composition (employers, workers, academics) and methodology demonstrates sophisticated understanding.

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Economic Theory: The NMW in Competitive Markets

In a perfectly competitive labour market, a minimum wage set above the equilibrium wage will:

1. Raise the wage from W* to W_min
2. Reduce employment from L* to L_d (firms demand fewer workers at the higher wage)
3. Create unemployment equal to (L_s - L_d), as more workers want to work at W_min than firms want to hire

This is the standard neoclassical prediction, and it formed the basis of opposition to the NMW before its introduction. Patrick Minford (1998) predicted that the NMW would destroy up to 2 million jobs.

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Economic Theory: The NMW in Monopsony Markets

In a monopsony labour market, a minimum wage set between the monopsony wage (W_m) and the competitive wage (W_c) can:

1. Raise wages from W_m to W_min
2. Increase employment from L_m to a higher level (up to L_c)
3. Reduce deadweight loss

This is because the minimum wage effectively makes the monopsonist's labour supply curve horizontal at W_min (up to the supply curve), making MCL = ACL = W_min. The firm no longer needs to raise wages for all workers to hire one more, removing the incentive to restrict employment.

This counterintuitive result — that a price floor can increase quantity — is specific to monopsony and does not apply to competitive markets.

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Empirical Evidence

The Card and Krueger Study (1994)

David Card and Alan Krueger (1994) conducted one of the most influential studies in labour economics. They compared employment in fast-food restaurants in New Jersey (which raised its minimum wage) with neighbouring Pennsylvania (which did not). They found:

• No significant reduction in employment in New Jersey
• If anything, employment increased slightly in New Jersey relative to Pennsylvania

This study was revolutionary because it challenged the textbook prediction of job losses and was consistent with monopsony power in low-wage labour markets.

Neumark and Wascher (2000) criticised Card and Krueger's methodology (using payroll data rather than phone surveys) and found small negative employment effects. The debate continues, but the consensus has shifted towards the view that moderate minimum wage increases have little or no negative employment effect.

UK Evidence

The UK experience since 1999 has broadly supported Card and Krueger: