When analysing the effect of a National Minimum Wage (NMW), the first point to consider is whether the mandatory NMW is higher or lower than the market wage for the same work in the same location.
Setting a national level minimum wage is therefore problematic, in that the market wage will be different in different areas of the country. For example, according to the government (Francis-Devine, 2025) the median wage in London is 30% higher than in the North East. So a NMW that is effective in London, might simultaneously be high enough to render some North East businesses unprofitable.
Where the market wage for the work in question is already higher than the minimum wage, then the NMW will have no effect. Where the market wage (without a mandatory minimum wage) is lower than the NMW, then the NMW will have an effect. What effect that is, depends on how competitive the local labour market is.
The Cleveland Fed (Guillaume and Tasci, 2007) notes that “in a competitive labor market, a binding minimum wage reduces employment and creates involuntary unemployment” compared to the situation without the NMW. As they say, “Some unemployed workers would gladly work for a lower wage but cannot find a job, and some employers would be happy to hire workers at a lower wage but the law forbids it.” The people most affected by this are the least skilled ones, the value of whose labour is now below the NMW, and who therefore no employer can employ without making a loss on that employment.
Almost by definition, young people are among the least skilled, and will thus be dis-proportionally affected, blocked from getting a low skill, low pay role, where they can learn and practice basic skills.
In contrast, in an environment where there is only one major local employer (a monopsony) who can normally set wages at whatever low level gets them enough workers, the Cleveland Fed notes that a “minimum wage increases employment by mitigating the negative effects of a monopsony’s power. All workers gain: More of them have jobs, and those who do receive a higher wage.”
An increased NMW might also be higher than the equivalent cost to automate or offshore the same task, such as with the automated ordering systems in fast food outlets, and the offshoring of call centres. A 2018 LSE study (Lordan, 2018) found that “low-skilled workers in automatable or offshorable employment are less likely to keep their job and work fewer hours in the next period as compared with similar workers in nonautomatable and non-offshorable jobs.”
So to summarise the worker side of the employment relationship, those low paid workers who still have a job after the NMW increase are better off because they are being paid more, and those workers whose employment is no longer beneficial to their employer are worse off because they no longer have a job.
On the employer side of the employment relationship, unless the employer decides to down-size, automate or offshore, a higher NMW means the employer faces increased costs, without any improvement in productivity: a loss of profitability, possibly to below zero. The employer might be able to pass on their increased costs to their customers via increasing their prices; however, an increased price is likely to reduce sales, further depressing profitability.
In choosing to force businesses to pay workers more than their labour is worth, the government is outsourcing part of its societal reduction of inequality expenditure to employers: “another stealth tax on businesses” as the Taxpayers Alliance (Ted Newson, 2025) described it, and specifically penalising job creation which could be seen as counter-productive.
Any increase in NMW for a particular individual is partially offset by a reduction in their Universal Credit, making it less useful to the worker recipient, but saving money for the government. According to Brewer and Agostini (2013) when they were projecting the effect of Universal Credit on families containing NMW workers, “Across the bulk of the income distribution, a 10% rise in the NMW leads to an increase in net family income amongst NMW families of around 3%; this breaks down to a figure of around 4% for families where the NMW is the main source of earnings, and around 2% for families where the NMW is the secondary source of earnings.”
Increasing the NMW is useful for governments, because it provides a rosy political narrative for low paid and left leaning voters, many of whom will be unaware of the diluting effects of high marginal effective tax rates, and the exclusionary effect of the NWN on the least skilled workers.
Overall the impact of an increase in the National Minimum Wage is mixed, with some winners and some losers. Governments might do better to remove it and increase the tax free personal allowance band, and empower regional unions to negotiate wages levels which maximise local employment.