AS Economics Again


Keir Martland

I’ve just been doing some economics past paper questions. Not wanting to exclude you from the fun, I’ve decided to type out one of my answers. If you think what I usually write is cobbler’s, just wait until you read this!

WJEC – EC2

 

January 2010

b. Using a diagram, discuss the view that a significant rise in the national minimum wage would be good for the UK economy. (What is there to discuss?)

The National Minimum Wage is a price floor for labour. If the minimum wage is raised significantly, then the wage floor has risen significantly meaning nobody can be paid less than the floor. The effect is to raise some people’s wages as more low paid jobs are now illegal and firms must pay the minimum wage or more to their employees.

(Insert price floor diagram – drawn in pen and without a ruler – with ‘Labour Market‘ as a title. Imagine two different price floors, one a little bit higher than the market price ‘wage min’ and another significantly higher ‘wage min 2’.)

Raising the national minimum wage significantly from wage min to wage min 2 will significantly increase the supply of labour by Q3-Q1. This is because, at wage min 2, the producer surplus for labour has increased by a large amount, making it more profitable to supply in the labour market. Presumably, this addition of supply will come from some who had previously chosen not to work, perhaps living on benefits. Therefore, in terms of the UK economy, this rise in the minimum wage will reduce the numbers of people on benefits if they get jobs which will mean a reduced welfare budget thus allowing the government to meet its target on deficit reduction more easily (really, why didn’t the coalition just increase it to £100 per hour?).

In addition, due to the raising of the wage floor, this might help reduce poverty (of course, that old chestnut) as fewer of those in work would be in low-paid jobs. As a result, consumer spending could be expected to pick up as people may end up with more disposable income. As aggregate demand is largely made up of consumption, this move would thus potentially stimulate aggregate demand, thereby boosting output (I just took you from increasing the minimum wage to boosting output. I’m thoroughly ashamed of myself. I will, however, get a decent amount of marks for something like that in my exam next month.)

On the other hand (this is when whatever I must have been smoking evidently wore off), a significant increase in the minimum wage would worsen the disequilibrium caused by the wage floor. The disequilibrium ensues because the consumer surplus for employers is reduced thus reducing their quantity of labour demanded all the while the quantity supplied actually increases.

A significant fall in the quantity of labour demanded may (by which I mean “will”) result which may (by which I mean “will”) be measured by Q2-Q4. Therefore, unemployment may (by which I mean “will”) increase. If (by which I mean “when”) unemployment increases, those newly unemployed will have no income so therefore a fall in consumption is to be expected, thus reducing aggregate demand and thereby reducing output.

Furthermore, by reducing the amount of workers in the economy, the move may (by which I mean “will”) cause aggregate supply to shift to the left since with fewer workers one would expect less to be produced and hence supplied. The shift to the left in aggregate supply could potentially (by which I mean “would definitely”)  lead to inflationary pressure as supply contracts and prices rise.

How a significant rise in the national minimum wage affects the economy would depend on how price elastic the demand for labour is. If it is perfectly inelastic, for example, then no reduction in quantity demanded would result and hence no reduction in aggregate demand or aggregate supply. However, as there clearly is unemployment in the economy and not all of it is ‘voluntary’, it is reasonable to assume that the demand for labour is wage elastic. Therefore, economic theory would predict an increase in unemployment, but without knowing the exact price elasticity, we cannot know how large the fall in quantity demanded, i.e. unemployment, would be. (Even in this very moderate concluding paragraph, I was probably a little bit too ‘one-sided’ for an exam. Of course, if my conclusion had been “A significant rise in the national minimum wage is likely to be good for the economy” then it wouldn’t have been one-sided at all…)

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8 comments

  • The state of the “economics” that is taught in the schools and universities (just about everywhere) is profoundly depressing – it is ignorance on stilts. Even before the Keynesian mess economics (or Political Economy) was not well taught well in this country – in the 19th century it was actually better taught by the “Liberal School” types in France, indeed even in the early 1900s it still was (the United States was following Germany by then – Richard Ely and all that drivel).

    Still there is a good side to all the horror – at least it brings people here together.

    I was asked a few months ago “forget about history and philosophy for a minute – what specific economic policy do you disagree with Sean Gabb about”.

    Well I thought, and I thought, and I thought – and I could not think of any conflict (ditto on rule of law issues and social policy matters – also part of “Political Economy” broadly understood).

  • By the way – you remind me of why I preferred history and philosophy at school and university to economics.

    If one wrote something that the teacher did not agree with, but argued one’s case well (with correct facts and so on) one would not be “marked down” in history or philosophy (or even in politics).

    In economics if one disagreed with the party line one would be “marked down” – no matter how well one argued.

    There is something wrong with a subject where one has to LIE (write things one knows to be false) in order to get a good exam result.

    • Philosophy is still immune from this. But, AS History is heading in the direction of economics simply because you are advised who and who not to quote in your essays.

      • So, for instance, quoting Runciman is a no-no, but quoting the ‘revisionists’ like Riley-Smith is guaranteed to earn you marks.

        • If I was to quote, let us say, any of the following: Robert K Massie on WW1, or W S Churchill or W Shirer on WW2, or Paul Johnson on more or less anything, would I get marked down?

  • Reminds me of the saying from my long ago schooldays: What do you call someone with one A level and two S levels? An ASS.

  • “This-is-what-you-must-do, Keir…
    Tell-them-what-they-want-to-hear!
    Blast the past and laud the present
    trend for all that’s evanascent, in

    the pervert-science camp of mountbanks
    that hate all banks,

    and want them dead while
    calling for us all to smile at guile.

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