Evaluate the likely microeconomic impact of an increase in the UK national minimum wage.

A minimum wage is the lowest level of hourly pay that is acceptable by law. There are a number of positive impacts that could result from an increase in the UK national minimum wage. Firstly, an increase in line with (or above) the rate of inflation could help low-income earners to cover the rising cost of living in the UK. Secondly, a higher minimum wage could help to reduce income inequality in the UK which, in turn, could lead to greater economic growth and political stability. Finally, a higher minimum wage could increase job satisfaction for low-income earners and could therefore result in higher labour productivity for businesses and the UK economy. However, a higher minimum wage could potentially lead to an increase in UK unemployment by raising labour supply (which is directly related to the wage rate) above the level of labour demanded by businesses. Higher labour costs for UK businesses could also result in reduced levels of production and profits which, in turn, could lead to a decrease in investment and economic growth. Alternatively, there is a risk that higher labour costs for businesses could simply be passed on to consumers in the form of higher prices for goods and services, thereby reducing consumer welfare. Overall, the impact of an increase in the UK national minimum wage will depend significantly on whether or not the new minimum wage is above or below the market wage rate. If below, the likely positive and negative effects may be limited. Similarly, the effects could be greater in industries where wages account for a large proportion of production costs or where labour may not be easily substituted with capital. In the long-run, however, firms may be able to adjust more easily to the new cost conditions.