The Impact of Minimum Wage Legislation

Julian Gough

Published: March 2017

Minimum wage policies are powerful political tools, but the economic effects are unlikely to be in the interests of society as a whole. Wages should be left to the free operation of market forces. Minimum wage rate policies are only effective in low-wage industries: the hotel sector labour market is used to develop the theory of minimum wages under different competitive conditions. The theoretical impact of a government-imposed minimum wage on the firms in an industry depends upon different competitive conditions in product and labour markets, but in most cases the number of firms falls as does the long-term demand for labour. In the UK, the Office of Budget Responsibility estimates that the National Living Wage will cut the total demand for labour hours by 0.4%, a reduction of 4 million hours of work a week causing 60,000 redundancies as a result of increased wage costs.

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