Minimum Wage

Definition

Minimum wage is the lowest hourly rate that employers are legally required to pay their workers. It is a price floor set by the government in labor markets to ensure a minimum standard of living for employees.

5 Must Know Facts For Your Next Test

1. Minimum wage is intended to protect workers from exploitation and ensure a livable income, but it can also lead to job losses and higher unemployment.
2. Raising the minimum wage can increase the cost of labor, leading to a decrease in the quantity of labor demanded by employers, known as the disemployment effect.
3. Minimum wage laws create a price floor in the labor market, which can result in a surplus of labor (unemployment) if the minimum wage is set above the equilibrium wage.
4. The impact of minimum wage on employment is a topic of ongoing debate among economists, with some studies showing a negative effect and others finding little to no impact.
5. Minimum wage can also contribute to higher prices for consumers as businesses pass on the increased labor costs, potentially offsetting the benefits for workers.

Review Questions

• Explain how minimum wage relates to the concept of price floors in the context of labor markets.
  • Minimum wage is a type of price floor set by the government in the labor market. It establishes a minimum hourly rate that employers must pay their workers, effectively creating a lower bound on the equilibrium wage. This price floor can lead to a surplus of labor, as the quantity of labor supplied exceeds the quantity demanded at the minimum wage level, resulting in unemployment.
• Describe the potential effects of raising the minimum wage on employment and the overall labor market.
  • Increasing the minimum wage can have both positive and negative effects on the labor market. On the one hand, it can raise the standard of living for low-wage workers and reduce poverty. However, it can also lead to a decrease in the quantity of labor demanded by employers, known as the disemployment effect. This can result in job losses, particularly for less-skilled or entry-level workers, as employers may choose to automate or reduce their workforce to offset the higher labor costs.
• Analyze how minimum wage can contribute to the causes of unemployment around the world, considering the principles of supply and demand in labor markets.
  • Minimum wage laws, when set above the equilibrium wage, can create a surplus of labor in the market, leading to unemployment. This is because the quantity of labor supplied at the minimum wage exceeds the quantity of labor demanded by employers. As a result, some workers who are willing and able to work at the prevailing market wage will be unable to find jobs. This disemployment effect can be particularly pronounced in developing countries or regions with high levels of youth unemployment, where the minimum wage may be set too high relative to the market-clearing wage, exacerbating the problem of joblessness.

Related terms

Price Floor: A minimum price set by the government, below which a product or service cannot legally be sold.

Labor Market: The market in which workers find paying work, and employers find willing workers.

Unemployment: A situation where people who are willing and able to work are unable to find jobs.