Understanding the Minimum & Living Wage

Understanding the Minimum & Living Wage

A national minimum wage sets the minimum hourly wage rate that is acceptable in law. A national minimum wage has been law in the UK since 1999, when the adult hourly rate was set at £3.60.

The long-term aim of a minimum wage is to remove the problem of poverty pay, which exists when the earnings from paid work do not result in a living wage and fail to push people out of poverty.

The advantages of a national minimum wage:

  • Greater equity will be achieved, and the distribution of income between the high paid and the low pay may be narrowed.
  • Poverty may be reduced as the low paid gain more income and the unemployed may be encouraged to join the labour market. In this case the higher wage is an incentive for individuals to supply their labour.
  • Less worker exploitation by labour market monopsonists, who are single employers, is able to pay below the market equilibrium.

By 2015, the adult rate had risen to £6.70p per hour and the rate for 18-20 year olds to £5.30p. In 2004, following a recommendation by the Low Pay Commission, a minimum wage of £3.00 per hour was introduced for under 18 year olds, and by 2015 this rate had risen to £3.87.

In 2016 a new ‘living wage’ was set for those over 25, at £7.20 per hour.


The disadvantages of a national minimum wage:

  • A high minimum wage can cause price inflation as firms pass on the higher wages in higher prices.
  • Falling employment, as demand contracts, and rising unemployment as supply extends.
  • The competitiveness of UK goods abroad can suffer compared with low wage economies, such as China and India.
  • Inward investment may be deterred, as foreign investors will look to avoid high wage economies.
  • The labour market may become inflexible in response to changes in the rest of the economy.
  • Workers and employers may be driven into the ‘unofficial’ labour market.


The full impact depends upon:

  • The level of the minimum wage, and;
  • The elasticity of demand for and supply of labour

(Source economicsonline.co.uk)