Can a minimum wage actually increase employment?
The answer is yes – depending on the circumstances in the labour market when a pay floor is introduced and also on what happens to the productivity of labour when a high (statutory) rate of pay is introduced. There are two main explanations for the possibility of higher employment • The Keynesian argument that higher wage rates will increase the real disposable incomes of lower-paid workers many of whom have a high marginal propensity to consume. Thus they will increase their own spending and this will feed through the circular flow of income and spending • The efficiency wage argument that raising pay levels for low-paid employees may have a positive effect on their productivity and efficiency. In addition to the psychological benefits of being paid more, businesses may take steps to improve production processes, workplace training etc if they know that they must pay at least the statutory pay floor. The importance of elasticity of demand and supply of labour The impact of a minimum w
