Figure 14-6 The Predicted Effects of Minimum Wages
industries, which often involve unskilled or semi-skilled workers. These
workers are usually not members of labour unions. Thus, the situations in
which minimum wages will affect labour-market outcomes include
competitive labour markets and those in which employers exercise some
monopsony power. The effects on employment are different in the two
cases.
Competitive Labour Markets
The predicted consequences for employment of a binding minimum wage
are unambiguous when the labour market is competitive. By raising the
wage that employers must pay, minimum-wage legislation leads to a
reduction in the quantity of labour that is demanded and an increase in
the quantity of labour that is supplied. As a result, the actual level of
employment falls, and unemployment rises. The excess supply of labour
at the minimum wage also creates incentives for people to evade the law
by working “under the table” at wages below the legal minimum wage.
The predicted effect of a minimum wage in a competitive labour market is
shown in part (i) of Figure 14-6.