Overview
This lecture explains the effects of minimum wage laws in the unskilled labor market using a supply and demand model, covering market equilibrium, price floors, unemployment, and surplus changes.
The Unskilled Labor Market Model
- The vertical axis shows wage rate per hour (price of labor), and the horizontal axis shows millions of labor hours per month.
- Labor demand comes from employers (buyers of labor), while labor supply comes from workers (sellers of labor).
- In an unregulated market, equilibrium wage is $6/hour with 22 million labor hours supplied per month.
Effects of a Minimum Wage (Price Floor)
- Minimum wage is set at $7/hour, above the equilibrium wage.
- A price floor is a legal minimum price; here, it is applied to wages.
- Employers now demand only 21 million hours of labor at $7/hour.
- More workers are willing to work at $7/hour, increasing labor supply to 23 million hours per month.
- Result: oversupply of labor (unemployment) of 2 million hours.
Impacts on Employment and Surplus
- 1 million fewer jobs are available after the minimum wage is set (demand drops from 22 to 21 million).
- Workers who remain employed (first 21 million hours) receive higher producer surplus.
- Employer surplus decreases for the labor that is still employed.
- Total surplus in the market decreases due to a deadweight loss of $1 million per month.
- The deadweight loss is the lost economic benefit due to the minimum wage.
Key Terms & Definitions
- Labor Market — a market where employers hire workers and workers offer their labor.
- Price Floor — a government-imposed minimum price in a market (here, minimum wage).
- Equilibrium Wage — the wage rate where labor supply equals labor demand.
- Producer Surplus — benefit workers receive above their opportunity cost.
- Consumer Surplus — benefit employers receive above what they pay for labor.
- Deadweight Loss — economic value lost when market equilibrium is not achieved.
Action Items / Next Steps
- Review supply and demand graphs for labor markets with and without minimum wage.
- Practice calculating surplus and deadweight loss from given data.