Effects of the National Minimum Wage on Unemployment and Inflation

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The National Minimum Wage (NMW) was introduced by the Labour Government on 1 April 1999 as a labour regulation to replace the wages council which had been abolished in 1993 as they were considered inappropriate. It is regulated under the National Minimum Wages At 1998 and the Minimum Wages Regulations 1999 and covers all workers except farm workers' wages which are regulated by the Agricultural Wages Board. (Rose 2004) defines NMW as a minimum wage any employer must pay its workers as defined by the law and is set as a price floor. All workers have a legal right to earn at least a minimum wage and all employers have a duty to pay their workers not less than a minimum wage.

The labour regulation was set to reduce poverty and income inequality, reduce the risk of firms compteting on wages in order to maximise profits especially targetted at industries with a substantial proportion of lowly paid jobs. The Inland Revenue is responsible for enforcing the NMW. Although most of the developed countries have had some form of National Minimum Wage system in place, (as far back as 1938 for the USA) before 1999, UK was the major western country without a National Minimum Wage System.

NMW rates are set by the government after considering recommendations by the Low Pay Commission (LPC), an independent public body set under the NMW Act 1998 to advise the government on the NMW. The LPC was also set up to monitor and report on the impact of the NMW on the economy. The LPC (1998) report identified the retail, including motor trade, cleaning. security. hospitality and social care as sectore that accounted for the highest group with low paid employees.

It is evident that a large proportion of the workforce in these sectors have benefitted from the NMW and to some extent there has been a reduction in poverty as some lowly paid workers had a significant increase in their incomes since its introduction. The limitation in the NMW reducing poverty is that the poorest...
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