Question

Using a Supply and Demand diagram, explain the policy of having a minimum wage set above the equilibrium for a certain group of workers. What type of price control is this? What happens in the market for labor as a result?

One concern about minimum wage increases is that it will raise costs for firms to hire workers. A second argument is that people will have higher incomes and spend more. Use a supply and demand diagram to explain one of these outcomes. (Which curve shifts and why?) How does this potentially cancel out the wage increase received by workers?

Answer 1

When the wage is set above the equilibrium wage level it is also known as the floor price. This is set as the government may realise that the supplier of goods and services are not earning as much as they desire. The government then sets a minimum wage level.

If the wage is set above the equilibrium wage level, the supply of labor will exceed the demand for labor. Thus leading to an increase in the level of unemployment as labor would work at a higher wage rate fixed by the government. Thus more jobs should be provided at such times.

If firms have to pay a higher amount of money to the labor then it may not necessarily increase it's cost as the labor employed is also less now.

People who would be working will have a higher level of money to spend but because of this policy if the government doesn't provide will sufficient jobs there will be many who would be unemployed or even work at a low wage.

Thus the potential increase in the wage of some workers is cancelled.