Government intervention in labour markets

The case for intervention

Labour markets can fail: monopsony employers pay below the competitive wage, immobility causes structural unemployment, discrimination denies some workers jobs or fair pay, and very low wages raise poverty and inequality.

Minimum and maximum wages

• National minimum wage: a legal wage floor. In a competitive market, if set above equilibrium, employment falls along the demand curve and there is excess supply of labour (unemployment). In a monopsony, a minimum wage set between the monopsony wage and the competitive wage can raise both wages and employment.
• Effects also depend on how far above equilibrium it is set, the elasticity of demand for labour, whether firms can substitute capital, and whether higher pay raises productivity and spending.
• Maximum wages (pay caps, for example on public sector or bank executives' pay) reduce inequality and public cost, but may cause shortages of skilled staff and a 'brain drain'.

Real data: the UK National Living Wage (age 21 and over) rose to £12.71 an hour on 1 April 2026, a rise of £0.50 or 4.1%; the 18 to 20 rate rose to £10.85, a rise of £0.85 or 8.5% (GOV.UK, 1 April 2026).

Direct taxes on employment

• Employers' social security contributions (such as national insurance in the UK) raise the cost of employing workers: labour demand shifts left.
• Income tax cuts raise the reward for work and may increase labour supply.
• Corporation tax affects firms' post-tax profits, so it affects investment and labour demand; low rates can attract multinational firms and jobs.

Immobility, discrimination and exploitation

• To reduce occupational immobility: subsidised training and apprenticeships, retraining schemes, better education.
• To reduce geographical immobility: relocation grants, more affordable housing, better job information and transport.
• Against discrimination: equal pay and anti-discrimination laws (by gender, ethnicity, disability, age).
• Against exploitation: maximum working hours, health and safety rules, enforcement against unpaid work.

Each measure has costs: training spending has an opportunity cost, and regulation raises firms' costs.

Worked example

Using the April 2026 UK National Living Wage of £12.71 and its £0.50 rise, find the previous rate and the percentage increase. Find weekly pay for 37.5 hours at the new rate.

1. Previous rate = 12.71 - 0.50 = £12.21.
2. % increase = 0.50 / 12.21 x 100 = 4.1%.
3. Weekly pay = 12.71 x 37.5 = £476.63.

Answer: £12.21; 4.1%; £476.63 a week.

Check yourself

1. Find the gross pay for a 40-hour week at the April 2026 UK National Living Wage of £12.71.
   Show answer

   £508.40. 12.71 x 40 = £508.40.

2. The UK National Living Wage rose from £12.21 to £12.71 in April 2026. Find the percentage increase, to 1 decimal place.
   Show answer

   4.1 %. 0.50 / 12.21 x 100 = 4.1%.

3. Labour demand is L = 900 - 30W and supply is L = 30W - 300. A minimum wage of $24 is set. Find the excess supply of labour.
   Show answer

   240 workers. Supply = 720 - 300 = 420; demand = 900 - 720 = 180; excess supply = 240. (The equilibrium wage was $20.)

4. In a competitive labour market, a minimum wage set above the equilibrium wage will
   • raise wages and employment
   • have no effect
   • reduce the wage
   • raise the wage but reduce employment
   Show answer

   raise the wage but reduce employment. Firms move up their demand curve and hire fewer workers.

5. In a monopsony labour market, a minimum wage set between the monopsony wage and the competitive wage can
   • only reduce employment
   • raise wages and employment together
   • lower wages
   • have no effect on wages
   Show answer

   raise wages and employment together. The employer no longer has to raise the wage for everyone to hire more, so it hires more.

6. A rise in employers' social security contributions (such as national insurance) is most likely to
   • shift labour supply to the right
   • raise labour productivity
   • increase employment
   • shift labour demand to the left
   Show answer

   shift labour demand to the left. It raises the cost of each worker to the firm.

7. Which policy is aimed at reducing occupational immobility?
   • Relocation grants
   • Subsidised retraining for workers in declining industries
   • Building affordable housing in cities
   • A maximum wage
   Show answer

   Subsidised retraining for workers in declining industries. It gives workers new skills.

Practise with instant feedback Print this lesson

Sources

• Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics specification (XEC11/YEC11), Unit 3 Business behaviour and Appendices 6 and 7
• GOV.UK press release, 1 April 2026: National Living Wage increases to £12.71 per hour
• Pearson Edexcel IAL Economics WEC13/01 mark scheme, January 2021

Last updated 8 November 2026. Spotted a mistake? Tell us.