ACCA Applied Skills · Financial Management · The economic environment for business
Which of the following is the most likely effect on a manufacturing company if the government introduces a binding minimum wage that is higher than the existing wage for many of its workers?
The most likely effect is higher labour costs, which the company must absorb through lower profit margins or pass on through higher prices. Productivity gains are not guaranteed, tax relief on wages is unchanged, and the policy has no automatic effect on export demand.
- AHigher labour costs, which may increase product prices or reduce profit marginsCorrect
- BLower labour costs through increased productivity guarantees
- CReduced corporation tax liability on all wages paid
- DAutomatic increase in demand for the company's exports
Explanation
A binding minimum wage above current pay raises the company's labour costs. The firm must absorb this through lower margins or pass it on through higher prices. Productivity gains are not guaranteed, wages are already tax deductible so there is no new tax reduction, and exports are not automatically boosted.
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