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Relationship Between Law of Demand and Supply and National Minimum Wage

Introduction

Supply and demand are one of the basic models of economics and they are main characters of a financial system. Demand means how much quantity of the service or product customer is willing to buy. At constant factors, price of the product increases or decreases as its demand increases or decreases respectively. While supply means the quantity of services or goods, producers willing to supply to consumer at certain price. At constant factors, quantity of products supplied increases as price of the product increased.

The Law of Demand

According to the ‘Law of Demand’, “Higher the price of the product results in less demand as less people wants to buy it, at the constant factors.” Graphically we can present the Law of Demand as below,

In figure 1, A, B and C are points on the demand curve. Every point on the curve shows a direct relationship between amounts of the products demanded (Q) and price (P). So, at point A, the quantity demand will be Q1 and the price will be P1, and so on. The demand relationship curve shows the negative relationship between price and quantity demanded. The higher the price of a good the lower the quantity demanded (A), and the lower the price, the more the good will be in demand (C).

The Law of Supply

According to the ‘Law of Supply’, “Higher the price of the product results in high supply of the quantity of the product.” Because higher supply of the product at high price the revenue is maximum. Graphically we can present the Law of Supply as below,

Figure 2: The Law of Supply

In figure 2, A, B and C are points on the supply curve. Every point on the curve shows a direct relation between quantity supplied (Q) and price (P). At point B, the quantity supplied will be Q2 and the price will be P2, and so on.

Equilibrium

It is the point, at which quantity demanded and supply of the goods are same or equal. At equilibrium distribution of products is more effective because amount of the product supplied is exactly the same as the quantity of the product demanded. Graphically we can present the Equilibrium condition as below,

Figure 3: Equilibrium

At the point of intersection of the supply and demand curve equilibrium takes place. At this point, the price of the goods will be P* and the quantity will be Q*. This figure is referred to as equilibrium price and quantity.

National Minimum Wages

A minimum wage is the least monthly, daily or hourly that employers should pay legally to the employees. Workers in Britain were sheltered for the first time on the last nine months of 20th century by ‘National Minimum Wages’. With the intention of the recommendation to the rate of ‘National Minimum Wages’ in 1997 the ‘Low Pay Commission’ was established. Low Pay Commission is a kind of social partnership made up of three employer representatives, three worker representatives and three independent members, whose suggestions have been always agreed and government has always executed the suggested National Minimum Wages. National Minimum Wages has been restructured seven times, since April 1999.

History – UK’s Minimum Wages

In 1909 wages had always been synchronized by borough, but in 1909 the ‘Liberal government’s Trade Boards Act’ formed the first national system of wage law. The act made four’ Trade Boards’ that set minimum wages which were different in different industries.

In 1945 after the war, the Trade Boards, which is now well-known as ‘Wages Councils’ broaden their power. Previously only relevant to industries where communal bargaining was weak, they were now broader in scope.

In 1986 the Wage Council system had grown-up during the mid 20th century, in 1980s there were 26 councils, covering 2 million workforces, primarily in low paid jobs like trade. In 1986 the Conservative government decreases the influence of the councils and prevents new ones from being starting, with the Wages Act.

In 1993 wage Councils are eliminated, due to resistance from trade unions, who favoured to practice group bargaining.

In 1998 ‘The Labour government’ established ‘The National Minimum Wage Act’. Trade unions, which in 1979 had characterized 55% of the employees, had been able of bargaining wages by group bargaining. But in 1999 less than one in four employees were unionised, and a national solution was projected. The policy is resisted by Conservatives.

In 1999 ‘The national minimum wage’ executed. ‘The Low Pay Commission’ judges the best rate to be ?3.60 an hour for labours who are 22 and above.

In 2009 Conservative backbencher Christopher puts forward a private members’ bill that suggested allowing workers to “optimum output” of the minimum wage

In 2010 on 1st October 2010 the wages increased to ?5.93, and the age at which meet the criteria for the top rate becomes 21 for the first time. A minimum wage for apprentices is also established, at ?2.50 per hour.

Main principles to highlight the ‘National Minimum Wages’:

It must be “enough to permit labours to sustain in vigorous existence. Hence, the wage must be designed on what the employees need for physical health and competence, and not what the trade will stand”.
The “law have to be national, that is it should apply to the entire country”.
It is to be a “nationwide least of real wages that worked out in its cash comparable will balance all local disparity in cost of livelihood”

Arguments in favour of ‘National Minimum Wages’

The primary aim of National Minimum Wages is to decrease poverty and decrease the differences in pay. Another intention of National Minimum Wages is to cut the misuse of low paid labours.

Potential Economic and Social Benefits

Higher tax revenues

Due to increase in the wages of low salaried jobs ,income tax and national insurance contribution is increased.

State benefits would cost less

Benefits like income support and benefits in council tax will be required less.

A reasonable distribution of income across the people

The primary reason of poverty contributes to increasing crimes. Argument is able to provide the employees reasonable pay for their work.

Increasing productivity of labour

Firms will have an inducement to lift the yield of workforce if they pay the minimum wage. This will lead to better investment in the human capital.

Reduction in labour turnover

Increased salary can decrease the labour turnover and rate of absence and can lead to motivate the labours to work to improve efficiency and reducing the expenses on turnover of employees.

Potential earnings from the ‘National Minimum Wages’

Figure 4: Potential earnings from the ‘National Minimum Wages’

The National Minimum Wages in the figure 4 is put over the standard free market wage rate for a given job. Total employment reduced from point E1 to point E2 (expressing a loss of income for those who lost the jobs). At point E2, there is an increase in the income of those who stay in work.

Arguments against of ‘National Minimum Wages’

Increase in marginal cost of employment

A National Minimum Wages put higher than the free-market wage for certain groups lifts the marginal cost of employing workers. So organisations will reduce jobs, cut down the hours of work and unemployment will increase.

Pay leap-frogging

Other labours will demand more wages to maintain differentials in pay, which will result in cost-push inflation and adversely affect the competitiveness of UK producers in terms of price in international market.

Increased unemployment

Low-skilled labours and young persons will be replaced by experienced older labours resulting into increase in unemployment.

Cost of training

Some organisations will try to cut the cost on training of employees because of falling rate of profit.

Distortionary effect

A National Minimum Wages does not take into consideration local disparity in cost of living and will result in distortionary effect in the UK labour market.

The impact of a minimum wage on employment

Figure 5: The impact of a minimum wage on demand and supply of labours

The impact of a minimum wage on employment points depends in part on the ‘elasticity of demand’ and ‘elasticity of supply’ of employment in dissimilar businesses. If workforce demand is comparatively inelastic then the narrowing in employment will be less harsh than if employers’ demand for workers is elastic with respect to changes in the income level.

Effect of the National Minimum Wage in Industries

According to, a report of ‘The Confederation of British Industry, (CBI) which gave the capable support to the National Minimum Wage, some key issues were as given below:

There are not much evidences showing major impact on employment or unemployment.
There are no visible errors upwards in typical earnings.
There are some impacts of the National Minimum Wage on wage differentials directing towards the higher rates for workers. But it is only applies to thirteen percents of organisations.
Exemption of under eighteen year olds from any minimum wage has been proven as useful for employers.
To balance the cost of the minimum wage, some organisations have adopted work practices by making staff multi- skilled in their job.
References:-
http://www.britannica.com/EBchecked/topic/156920/demand-curve
http://www.britannica.com/EBchecked/topic/574671/supply-curve
http://wrap.warwick.ac.uk/1560/1/WRAP_Stewart_twerp630.pdf
http://www.totalpolitics.com/blog/28013/history-of-the-uk-s-minimum-wage.thtml
http://www.lowpay.gov.uk/lowpay/report/pdf/Revised_Report_PDF_with_April_date.PDF
http://www.direct.gov.uk/en/Employment/Employees/TheNationalMinimumWage/DG_10027201
http://www.investopedia.com/university/economics/economics3.asp
http://www.investopedia.com/terms/d/demand.asp
http://www.investopedia.com/terms/s/supply.asp
http://www.hmrc.gov.uk/paye/payroll/day-to-day/nmw.htm
http://tutor2u.net/economics/content/topics/poverty/minwage_for.htm

http://tutor2u.net/economics/content/topics/poverty/minwage_against.htm