ACCA Applied Knowledge · Business and Technology · Political and legal factors affecting business
A government introduces a law requiring all employers to pay a statutory minimum wage above the current market wage for low-skilled work. Which of the following is the most likely impact on a labour-intensive business?
A statutory minimum wage set above the market rate raises labour costs, which hits labour-intensive firms hardest. They may respond by raising prices, accepting lower margins or replacing staff with automation, rather than enjoying lower costs.
- ALower labour costs and higher profit margins
- BHigher labour costs, which may lead to higher prices or a switch towards automationCorrect
- CNo effect, because wages are set only by trade unions
- DReduced need for compliance with employment records
Explanation
A minimum wage above the market rate raises the cost of labour for employers, especially labour-intensive ones. They may respond by raising prices, accepting lower margins, or substituting capital such as automation for labour. Lower costs would be the opposite, and employers must still keep wage records.
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