wages

Effect of minimum wage on economic growth, inflation and AD/AS

Effect of minimum wage on economic growth, inflation and AD/AS

How does the minimum wage affect aggregate demand/aggregate supply and macroeconomic factors such as inflation, unemployment and economic growth? A minimum wage is the statutory minimum wage that employers can pay per hour. In 2017, the UK minimum wage was set at £7.50 an hour for workers over 25. Higher wages increase incomes and potentially cause higher consumer spending. However, there is a danger a minimum wage can cause higher unemployment, which would cause lower economic growth.   Effect on economic growth If workers receive a pay increase, then there will be…

UK wage growth

UK wage growth

Wage growth is a key factor in determining living standards, aggregate demand and inflation. If wages increase faster than inflation, then households will be able to afford more goods and services. Real wage growth = nominal wage growth – inflation. In the post-war period, apart from short-lived recessions, real wage growth has been positive, growing at a trend rate of roughly 2% 2008-14 This period was one of the longest periods of falling real wages. It was due to:Great recession Depreciation in Pound Sterling, raising price of imported goods Rise in…

Economic growth with falling real wages

Economic growth with falling real wages

The UK recovery paints an unusual situation. We have both positive economic growth and falling real wages. How can we have economic growth with falling real wages? Real wages are not the only source of economic growth. We can see growth from other components of AD – I (Investment), G (Government spending) plus net exports (X-M) Also, it is possible for consumer spending to rise despite falling real wages (at least in the short term). For example, if spending is financed by borrowing or declining savings ratio. Consumer spending could also be…

Wages Declining as a Share of National Income

Wages Declining as a Share of National Income

The ILO recently produced their growth and wages report for 2012/13. This suggested that across the developing world, labour markets are being characterised by falling real wages and a decline in labour’s share of national income. In particular:Real wage growth has been flat – even negative in the past few years. There is an increasing gap between productivity growth and wage growth. Wages are not rising along with productivity. Wages are becoming a smaller share of national income.  In 16 developed economies, labour took a 75% share of national income in the…