Why a wage floor above equilibrium cuts employment, the difference between jobs lost and excess supply, trade unions, regional minimum wages, maximum wages and when a minimum wage can raise pay without costing jobs. Through the April 2026 National Living Wage.
From 1 April 2026 the National Living Wage, for workers aged 21 and over, rose by 4.1%, from £12.21 to £12.71 an hour. Workers aged 18 to 20 must be paid at least £10.85, and under-18s and apprentices at least £8.00.
The minimum wage was created by an Act in 1998 and came into force in April 1999. The government set the Low Pay Commission a target of two-thirds of median earnings for the adult rate.
Does a higher legal wage help low-paid workers, or cost some of them their jobs?
Source: Low Pay Commission and GOV.UK, National Minimum Wage rates from April 2026.
A minimum wage is a legal floor under the wage rate. Like any minimum price, it only has an effect if it is set above the equilibrium wage.
The model assumes a competitive labour market: many firms and many workers, none of whom can set the wage on their own. It also assumes the law is enforced.
Aims: reduce low pay and in-work poverty, and make work pay more than benefits, which strengthens the incentive to work.
The minimum wage rises from £10 to £12 an hour.
Before the rise, 100 people work in this market. At £12, firms want 90 workers and 120 people want a job.
How many people who had a job at £10 lose it?
Employment falls from 100 to 90, so 10 existing jobs go. The other 20 in the gap of 30 are new people drawn in by the higher wage. That difference is the heart of today’s lesson.
Draw it in exam order. Axes first: wage rate up the side, quantity of labour along the bottom. Then D, the firms’ demand for labour, and S, the workers’ supply. They cross at the equilibrium wage, We, of £10, with 100 employed, Qe.
Check: In a labour market, who demands labour?
Firms hire workers, so firms demand labour and workers supply it.
Now the minimum wage, Wmin, at £12. Firms contract along D: they only want 90 workers, QD. More people want to work at the higher wage, so supply extends along S to 120, QS. The gap, 30, is excess supply: people who want a job at £12 and cannot get one. This is real wage unemployment.
Check: The minimum wage is set at £12, above We. How many workers are employed?
Firms decide how many to hire. At £12 they demand 90, so 90 are employed, even though 120 want to work.
This is the step most answers get wrong. **Jobs lost** is Qe − QD: 100 − 90 = 10. **Excess supply** is QS − QD: 120 − 90 = 30. The other 20 are **new entrants**, people who would not work at £10 but want to at £12. So never write that 30 people lose their jobs.
Check: Qe = 100. After the floor, QD = 90 and QS = 120. How many existing jobs are lost?
Jobs lost is Qe − QD = 100 − 90 = 10. The excess supply of 30 is bigger because it includes 20 new entrants.
Who gains? The 90 who keep their jobs, and keep their hours, earn £2 an hour more. Who loses? The 10 who lose their jobs, and firms, whose wage costs and profits change. Firms may pass some of the cost on in higher prices, so consumers can lose too. Total hourly pay goes from £1,000 (£10 × 100) to £1,080 (£12 × 90).
Check: Which group is made better off by the minimum wage in the simple model?
They are paid £2 an hour more for the same hours.
How many jobs go depends on the **wage elasticity of demand for labour**. With an elastic demand curve, employment at £12 falls to 60: 40 jobs lost. With an inelastic one it only falls to 96. Demand for labour is more elastic when machines can replace workers, when wages are a big share of costs, and when the product’s demand is price elastic.
Check: Which demand for labour loses more jobs from the same minimum wage?
The more elastic the demand for labour, the more firms cut employment when the wage rises.
The competitive model is a prediction, not a fact. UK minimum wage rises since 1999 have cost few jobs. One reason: some employers are the main buyer of labour in an area and pay below the competitive wage. A well-set floor can then raise pay and employment together. This is monopsony; its diagram is beyond AS, so explain it in words.
Check: Since 1999, UK minimum wage rises have cost fewer jobs than the simple model predicts. Which is the best explanation?
Where an employer has the power to hold pay down, a floor can raise pay without cutting jobs.
A **trade union** bargains with employers for its members. In the competitive model, a negotiated wage above We works just like a minimum wage: higher pay for those in work, fewer jobs. But unions also give workers a voice. That can cut staff turnover, push for training and raise productivity, which shifts demand for labour to the right.
Check: A trade union bargains a wage above the equilibrium. In the simple model, this acts like:
Firms cannot pay below the agreed rate, so it works like a wage floor: higher pay for those employed, but firms may hire fewer.
A **regional minimum wage** means different floors in different parts of the UK. Today the legal rates are the same everywhere. Where typical pay is low, as in the North East, Northern Ireland or Wales, a UK-wide floor bites harder, so a lower regional floor might protect jobs. But it would cut the pay of the lowest-paid workers in lower-income regions.
Check: Typical pay in the North East and Northern Ireland is well below London. One argument for a lower minimum wage in lower-pay regions is that it would:
Where local wages are lower, a UK-wide floor bites harder, so a lower regional floor would bind less and cost fewer jobs.
The opposite is a **maximum wage**, or pay cap, set below equilibrium. At £8, firms want 110 workers but only 80 are willing to work. The result is a shortage: unfilled vacancies. Public-sector pay restraint can work like this: if nurses’ pay rises more slowly than pay elsewhere, vacancies rise.
Teacher tip: A maximum wage can also be a pay ratio, such as top pay capped at 20 times a firm’s lowest wage. The UK has no legal maximum wage.
Check: The government caps the pay of a group of workers below the equilibrium wage. What is the likely result?
At a lower wage, firms want more workers but fewer people want the job, so vacancies go unfilled.
The gap between QD and QS is excess supply, not jobs lost. Only 10 people lose a job they had (Qe − QD). The other 20 are new entrants drawn in by the higher wage.
Using a diagram, explain the likely effects of a minimum wage set above the equilibrium wage in a competitive labour market.
A minimum wage is a legal floor on the wage rate. It only has an effect if it is set above the equilibrium wage.
[Diagram: D and S for labour crossing at We and Qe. A horizontal minimum wage above We, with QD on D and QS on S marked. Excess supply QS − QD labelled, and jobs lost Qe − QD.]
At the higher wage, labour costs firms more, so they contract along the demand curve and employment falls from Qe to QD. At the same time, more people want to work at the higher wage, so supply extends to QS. The result is excess supply of labour, QS − QD: unemployment. Only Qe − QD of these people have lost jobs; the rest are new entrants.
Workers who keep their jobs and hours gain from higher pay, while those who lose their jobs lose out. How many jobs go depends on the wage elasticity of demand for labour: where machines can replace workers or wages are a large share of costs, more jobs are lost.
National Living Wage and National Minimum Wage rates: Low Pay Commission and GOV.UK (April 2026). The labour market figures in the diagram are invented to make the arithmetic clear. Diagrams drawn with Rough.js and perfect-freehand, both MIT licensed. Your answers are saved only on this device.