AQA A-level Economics: The National Minimum Wage and discrimination in labour markets (7136)

This guide follows the AQA AS and A-level Economics specification (version 1.3, 29 June 2022), first taught from September 2015. It covers two parts of the sub-section called The labour market: The National Minimum Wage (3.1.6.6) and Discrimination in the labour market (3.1.6.7). The combined PDF prints the A-level versions as 4.1.6.6 and 4.1.6.7. Every country, firm and number below is invented, for illustration only.

Use it with the revision notes and the practice questions. The course hub is AQA A-level Economics, the printable checklist tracks progress, and the free 10-minute diagnostics show weak spots.

Outcomes at a glance

Section	What you must be able to do
3.1.6.6	Explain the effects of a national minimum wage upon labour markets
3.1.6.6	Give the advantages and disadvantages of a national minimum wage
3.1.6.7	State the conditions necessary for wage discrimination
3.1.6.7	Explain the impact of gender, ethnicity and other discrimination on wages, levels and types of employment, using real-world examples
3.1.6.7	Assess the advantages and disadvantages of wage discrimination for workers, employers and the economy

The National Minimum Wage (NMW)

A national minimum wage sets a legal lowest hourly pay. Economically it works as a price floor in the labour market. The specification expects you to say what happens in labour markets, so the answer depends on which kind of market it is.

Effect in a competitive labour market

Use Country A’s market for care workers (illustrative). Labour is measured in thousand hours per week and the wage in crowns (cr) per hour.

• Demand for labour: L = 1,480 − 60w
• Supply of labour: L = 125w
• Equilibrium: 1,480 − 60w = 125w, so 185w = 1,480, w = cr 8 and L = 1,000.

Now a minimum wage of cr 9 is set above the equilibrium wage.

	Working	Result
Employment (demand)	1,480 − 60 × 9	940
Labour willing to work (supply)	125 × 9	1,125
Excess supply	1,125 − 940	185
Jobs lost	1,000 − 940	60 (6%)
New people seeking work	1,125 − 1,000	125

The 185 is 60 displaced workers plus 125 new entrants, so measured unemployment rises by more than the jobs lost. The wage rises 12.5% and employment falls 6%, so the elasticity of demand for labour over this range is −6 ÷ 12.5 = −0.48. It is inelastic, so the total wage bill rises: 8 × 1,000 = cr 8,000 (thousand per week) becomes 9 × 940 = cr 8,460, up 5.75%. Workers who keep their jobs gain; 60 do not. A floor set below cr 8 has no effect, because the market wage is already higher.

Diagram in words: draw wage on the vertical axis and labour on the horizontal. The floor is a horizontal line at cr 9 above equilibrium. Employment is read from the demand curve and the supply curve gives the labour willing to work. The horizontal gap between them is the excess supply.

Effect in a monopsony

A monopsony employer pays less than the competitive wage and employs fewer workers. Here the supply curve is w = 4 + 0.004L, so the marginal cost of labour is 4 + 0.008L. The marginal revenue product of labour (MRP) is 16 − 0.004L.

• Unregulated: MRP = marginal cost gives 12 = 0.012L, so L = 1,000 at a wage of cr 8 (read from supply), while MRP is cr 12.
• Competitive benchmark: MRP = supply gives 12 = 0.008L, so L = 1,500 at cr 10.

A minimum wage makes the wage the marginal cost of each extra worker up to the point where the supply curve reaches the floor. This is why employment can rise:

Minimum wage	Employment	Workers willing	Unemployment
none	1,000
cr 9	1,250	1,250	0
cr 10	1,500	1,500	0
cr 11	1,250	1,750	500
cr 12	1,000	2,000	1,000
cr 13	750	2,250	1,500

Between cr 8 and cr 12 employment is at least as high as before. Employment is highest when the floor equals the competitive wage (cr 10). Above it, the employer hires where MRP equals the floor, so employment falls. The lesson for evaluation is that a minimum wage does not automatically destroy jobs. It depends on how much monopsony power exists and on how high the floor is.

Other effects

Chains of reasoning to use:

• Costs and prices: higher wage bill → higher unit costs → firms raise prices or accept lower profit → possible cost-push inflation, mainly in labour-intensive sectors.
• Differentials: employers on slightly higher pay may raise their wages to preserve the gap, so the cost reaches beyond the lowest paid.
• Productivity: better pay → higher motivation, lower staff turnover and training costs → higher output per hour, which offsets some of the cost.
• Substitution: dearer labour → firms use more capital or fewer, more skilled workers → low-skilled jobs fall.
• Demand and the government budget: low earners spend most of any extra income, which supports demand. Higher pay can also raise tax receipts and cut spending on in-work benefits.
• Poverty: the floor applies to individuals, not households. Compare three households (illustrative, cr per week). A single parent working 30 hours moves from 30 × 8 = 240 plus 20 benefit (260) to 30 × 8.80 = 264 plus 20 (284): a gain of 24, still below a poverty line of 300. A teenager on 20 hours in a well-off household gains 16 but was never poor. A worker who loses the job drops from 260 to 130 including benefit. The policy helps some poor households and misses others.

Worked example: passing on higher wage costs

A small laundrette has weekly costs of cr 10,000 and revenue of cr 10,800. Staff on the minimum wage cost cr 4,000 a week, and staff just above it cost cr 1,500. The minimum rises 10% and the next group gets 5% to keep a gap.

1. Extra cost = 4,000 × 10% + 1,500 × 5% = 400 + 75 = cr 475.
2. As a share of total costs: 475 ÷ 10,000 = 4.75%.
3. Price rise needed to hold profit at the same volume: 475 ÷ 10,800 = 4.4%.

Whether the laundrette can do this depends on how elastic demand for its service is.

Advantages and disadvantages

Advantages	Disadvantages
Raises pay of the lowest paid	May cause unemployment, mainly among young and low-skilled
Can raise employment under monopsony	Raises costs and may push prices up
Improves incentives to work versus benefits	Poor targeting: not all low earners are in poor households
May raise productivity and loyalty	Firms may cut hours, training or perks, or hire fewer people
Reduces inequality and in-work benefit costs	Compliance costs, evasion and informal work
Raises consumer spending by low earners	May hurt international competitiveness in labour-intensive industries

Real-world facts you can use with confidence: the UK introduced its NMW in 1999, uses different rates for different age bands, and takes advice on the rates from the Low Pay Commission.

Evaluation points: the level of the floor relative to typical earnings; the elasticity of demand for labour (more elastic means more jobs lost); how much monopsony power exists; the size of the productivity response; the time period (firms adjust slowly through prices and technology); and which group matters, workers who keep jobs, those who lose them, employers or consumers.

Discrimination in the labour market

Wage discrimination exists when workers with equal productivity and the same job are paid different amounts because of a characteristic such as gender or ethnicity. Pay differences that reflect different skills, hours or experience are not discrimination.

Conditions necessary

1. Employer power over wages. A wage-taking firm in a competitive market cannot pay one group less, because that group would move to a rival paying the MRP. Monopsony power, or employer-set pay, is needed.
2. Separable groups. The employer must be able to identify the groups and keep them apart so that the lower-paid cannot claim the higher wage. Pay secrecy helps.
3. Different elasticities of labour supply. The group whose supply is less elastic is paid less, as in price discrimination.
4. Barriers to mobility. Caring duties, local labour markets, unrecognised qualifications or lack of information keep workers in place.
5. Prejudice or weak competition. Employers or colleagues may hold prejudice, or hire on perceived group averages (statistical discrimination). Law, unions and transparency are weak constraints.

Worked example: a discriminating monopsonist

A firm hires two groups, X and Y. Each worker adds cr 30 an hour (MRP = 30) whichever group they belong to. Group X supply: w = 12 + 0.1L. Group Y supply: w = 6 + 0.3L.

	Group X	Group Y
Marginal cost of labour	12 + 0.2L	6 + 0.6L
MRP = marginal cost	L = 90	L = 40
Wage from supply	cr 21	cr 18
Elasticity of supply	21 ÷ (0.1 × 90) = 2.33	18 ÷ (0.3 × 40) = 1.5
Competitive employment and wage	180 at cr 30	80 at cr 30
Employer gain from paying less than MRP	9 × 90 = cr 810	12 × 40 = cr 480

Group Y has less elastic supply and gets the lower wage, a gap of (21 − 18) ÷ 21 = 14.3%, despite identical productivity. Both groups are underpaid and under-employed relative to the competitive outcome. The employer’s extra profit is 810 + 480 = cr 1,290 an hour.

Impact on wages, levels and types of employment

• Wages: lower pay for the affected group in the same role. Pay-gap figures compare group averages; a headline gap overstates discrimination if part reflects occupation, hours and experience.
• Employment levels: lower employment and higher unemployment or inactivity for the affected group, as in the table above (40 against 80 hired).
• Types of employment: occupational segregation (clustering in lower-paid sectors), part-time or insecure contracts, fewer promotions (a glass ceiling), and overqualification.
• Gender: pay gaps and clustering in caring roles. Ethnicity: lower callback rates, lower pay for equal qualifications. Other: age, disability and religion.

Worked pay gap: mean hourly pay is cr 20 for men and cr 17 for women, so the gap = 3 ÷ 20 = 15%. For the same grade and hours women earn cr 19, a gap of 1 ÷ 20 = 5%. Two-thirds (2 ÷ 3) of the gap is explained by job type and hours. The remainder is unexplained and may reflect discrimination, though other unmeasured factors may play a part.

Real-world examples: in the UK, the Equality Act 2010 prohibits discrimination on protected characteristics such as sex, race, age and disability, and larger employers in Great Britain must publish gender pay gap figures.

Advantages and disadvantages

	Advantages	Disadvantages
Workers	Favoured group gains higher pay	Disadvantaged group loses income, jobs, training and morale
Employers	Lower costs and higher profit (cr 1,290 above)	Legal and reputation risks, lost talent, lower motivation
Economy	Under perfect wage discrimination (each worker paid their own supply price), employment would match the competitive level, though the employer keeps the surplus	Waste: talent misallocated, output below potential, more inequality

Evaluation: the benefit to employers is short-run and depends on weak enforcement. Over time, discrimination wastes talent and widens inequality.

Common errors

• Describing the competitive floor result for monopsony, or vice versa.
• Counting only jobs lost and ignoring new entrants when measuring unemployment.
• Calling any pay gap discrimination without separating explained from unexplained parts.
• Forgetting that wage discrimination needs market power.

Official syllabus

AQA AS and A-level Economics specification (7135 and 7136), first teaching from September 2015, version 1.3, published by AQA. Sections 4.1.6.6 and 4.1.6.7.