Macroeconomics For Dummies®, uk edition Published by: John Wiley & Sons, Ltd

Considering possible causes of structural unemployment

Structural unemployment has a number of possible causes. Here we discuss three that economists think are the most relevant: minimum wages, trade unions and efficiency wages. It would be wrong to suggest that economists think that these three always cause unemployment. Rather, excessively high levels of minimum wages, trade union power and efficiency wages are of potential concern. Here’s why.

Minimum wages

The minimum wage is the legal minimum that a firm can pay a worker. In the UK, a firm must pay an adult over 21 at least £6.50 an hour, an adult aged 18–20 at least £5.13 an hour and someone under 18 at least £3.79 an hour (2014 rates).

The idea behind the minimum wage is a noble one – to increase the incomes of the lowest-paid workers and protect them from exploitation. However, a minimum wage can have unintended consequences. Here are two important points to note:


Not binding minimum wage: When the minimum wage is below the equilibrium market wage for a given industry, it has no impact whatsoever (see where the diagonal lines for supply and demand intersect for Industry B in Figure 6-5). Everyone is already being paid more than the minimum wage.

Binding minimum wage: In industries where the equilibrium market wage is below the minimum wage (where the supply and demand lines intersect for Industry A in Figure 6-5), the introduction of the minimum wage increases wages for those employed in that industry but at the same

time it creates unemployment in those industries where the minimum wage is binding.


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Figure 6-5: Minimum wage: Binding and not binding.


The minimum wage is lower for young people for good reason. On average young people tend not to be very experienced, which lowers their productivity and the wages that firms offer them. If the minimum wage for young people was the same as for all adults, high levels of unemployment would result among the young. That is, the market equilibrium wage would be far below the minimum wage for many young people.