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Cause and Effect of a Minimum Wage
The government regulates the labor market by setting a minimum wage that firms must pay their workers. This has the same effect as a price floor. If the equilibrium wage is higher than the minimum wage, then the minimum wage has no discernible effect on the market, since the equilibrium point will be above the minimum wage. In short, the minimum wage is nonbinding. If the equilibrium wage is below the minimum wage, however, then there will be a surplus of labor: at the artificially high, binding minimum wage, market demand for labor is lower than market supply, meaning that there will be unemployment (a surplus of labor supply). In this situation, not every worker who is willing to work for the minimum wage will be able to find a firm who wants to hire them.
Does this mean that minimum wage laws are a bad idea?
There are arguments for either side. On one hand, if the minimum wage were removed, there should be lower unemployment, but workers might not make enough money to support themselves and their families. On the other hand, with the minimum wage in place, the employed are able to make more money, but more workers are forced into unemployment and forced to rely on government assistance, while making no contribution towards national productivity.
Whom does the minimum wage hurt the most?
Firms will always want skilled workers who can make large contributions to productivity. When the minimum wage is in effect, it is the least productive workers who are cut from payrolls first. The skilled workers will keep their jobs, perhaps even with higher pay; but the unskilled workers, because their marginal revenue product (\(MRP\)) is lower than the new minimum wage, will be unemployed. The irony of the situation is that most people who advocate for a higher minimum wage are hoping to help out the workers at the bottom of the ladder, when in reality, a higher minimum wage could very well put those workers out of a job.
