Question

Using a simple supply and demand drawing, illustrate the likely effects of a minimum wage law in the labor market. What might be some non-law-and-economics arguments for such a policy?

Please explain in detail.

Answer 1

As it can be seen in the below diagram that initially market equilibrium wage rate was W* and equilibrium labor quantity was QL*.

But when the minimum wage law has been imposed, and it was determined above the market equilibrium wage rate W* and it was Wm. But at this wage rate Wm, the labor supplied is greater than the labor demanded (Qs-Qd) unit of labor.

According to the non-law-and-economics arguments for such a policy is that it is good for the labor who are employed now but who have lost the job they are worse off. The employer is also worse off because now he had to pay higher wages compared to earlier. Hence it is costly for him to hire more workers at high wage rate, so he lay off some workers. Hence he is also worse off. This is because his cost of production has increased due to the minimum wage rate law. Since he hires fewer workers so production will be less and so the profit will also be low.

The diagram has been plotted in the below diagram.