The first National Minimum Wage (NMW) was introduced in April 1999. Standard textbook models of the Labour market suggest that a minimum wage leads perfectly competitive employers to cut employment; whereas in monopsony employment may not fall and may even increase. .
Economists are divided in their opinions about the effects of minimum wages. Some still follow early research that minimum wages have a small negative effect on employment, others have taken a following to more recent "before and after" microeconomic studies which fail to identify any employment effect at all. Opinions about the impact of minimum wages on poverty are just as divided. Some believe minimum wages are very effective anti-poverty instruments, whilst others argue that minimum wages will simply raise the incomes of second-earners in relatively well-off households, whilst having no effects on the poor.
The impact of the NMW on employment, wage inequality and poverty is extremely difficult to identify not least because of poor employment data, especially data on hourly earnings. This essay will highlight the evidence presented in recent studies, and will attempt to shed light on a topic which is still very actively debated. .
The UK labour market provides a good testing ground for the effects of minimum wages as it has never been subject to a nationwide minimum wage. However, estimating the impact of the NMW on aggregate employment is difficult. Aggregate employment throughout the period surrounding the introduction has been strong, reaching record levels in 2000. We cannot therefore know what would have happened in the absence of the minimum wage. The LPC attempted to estimate the effect of the minimum wage by comparing employment rates across different age groups. They compared changes in employment amongst 16-17 year olds (not affected by the minimum wage) with changes in employment amongst 18-21 year olds (where the minimum wage bit hardest).