examines the effects of implementing a minimum wage in a
competitive labour market and provides a basis for
understanding the often-heard claim that minimum wages lead
to an increase in unemployment.
The accompanying figure shows the demand and supply curves
for labour services in a fully competitive market with Hours of
Employment on the horizontal axis and Hourly Wage Rate on
the vertical axis. In the absence of any legislated minimum
wage, the equilibrium in the labour market would be a wage
equal to and a level of employment equal to.
Now suppose the government introduces a minimum wage
equal to that is greater than The increased wage has
two effects. First, by increasing the cost of labour services to
firms, the minimum wage reduces the level of employment to
The second effect is to increase the quantity supplied of
w 0 E 0wmin w 0.E 1.