Explain one possible effect on employment of the government’s decision to lift the pay cap

Lifting the pay cap can have varying effects on employment:

• One possible effect is increased unemployment due to rising wage costs. Organisations may lay off workers to limit cost increases and maintain profits. Firms might also replace labour with machinery to reduce costs. Additionally, a negative multiplier effect could lead to further unemployment as those who lose their jobs will spend less.
• Alternatively, lifting the pay cap could decrease unemployment as the labour supply might increase. Higher wages make entering the labor market more attractive, providing an incentive for those not working to seek employment.