Minimum Wage. The minimum wage is the legal minimum hourly rate of pay.
The minimum wage is the legal minimum hourly rate of pay. The government may impose a minimum wage to raise income and alleviate poverty. A minimum wage causes wages to rise so the quantity demanded of labour falls and the quantity supplied of labour rises. Because Ls > Ld, there is excess labour supply. Minimum wages only benefit Ld amount of workers, Ls – Ld workers are willing and able to work at the minimum wage but are involuntarily unemployed.
Benefits of a Minimum Wage
- Higher wages. Workers receive a higher wage, they can buy more goods and services so living standards rise.
- Increased labour productivity. Workers may be incentivized to become more productive if they are paid a higher wage.
- Reduced inequality. A higher wage for the lowest paid workers means poverty falls and income inequality decreases.
Costs of a Minimum Wage
- Magnitude. A minimum wage set slightly above equilibrium will not increase wages that much. A minimum wage set below equilibrium will not have any affect.
- Lower quality. Workers may be incentivized to work less hard because they are guaranteed a high wage, so the quality of the produced good falls.
- Inflation. A higher wage means firms’ costs rise, firms’ prices rise and consumers cannot buy as much so living standards fall.
- Increased unemployment. Unemployment may rise because wages are too high. In the diagram above, Ls – Ld workers are willing and able to work at the minimum wage but are involuntarily unemployed.
- Length. A minimum wage set for a short period of time will have little effect.
- Illegal workers. Firms may be encouraged to hire illegal workers so as to avoid paying the higher minimum wage.