Question

Graphically illustrate the labor market’s situation in case of a minimum wage enforcement. Discuss with at least 200 words.

Answer 1

In the labor market, labor supply is determined by the available workforce of the nation. It includes all the individuals who would like to participate in the labor market, and offer their labor. Labor demand is determined by the firms - the employers who would like to hire labor. The intersection of supply and demand determines the wage rate.

Now, a minimum wage is like a price floor. It determines the minimum wage rate that must prevail in a certain market. It is set by the government, and is a legal mandate. No firm can pay a lower wage rate than the minimum wage.

It becomes binding especially when it is set above the equilibrium price. This means that in the absence of a minimum wage, the actual wage would have been lower.

This can be shown in the diagram below:

Due to the minimum wage, the supply of labor increases. More workers now want a job. However, the demand for workers decreases, since now firms have to pay a higher wage. This increases the cost of production.

This mismatch between demand and supply leads to unemployment. Since firms now have to pay a higher wage, they will become very selective about the workers they hire.