Labor Market with a Minimum Wage Law

One important application is to analyze the effects of a minimum wage law. This is shown in Figure 5, below. In the figure, the minimum wage is at W, above the equilibrium wage. As a result, employers will demand and hire only N_d labor-hours, less than would be hired at the equilibrium wage. On the other hand, N_s labor hours are supplied, and we have an excess supply.

Figure 5: Supply and Demand for Labor with a Minimum Wage Law

Workers still employed under the minimum wage law are presumably better off, but there are workers offering N_s-N_d labor hours who cannot find jobs in the industries covered by the minimum wage. What are they to do? They might

Shift into industries with equilibrium wages above the minimum wage.

But most will not be able to do this -- if they could get jobs at higher than minimum wages, they probably would have done it already.

Shift into industries that pay less than the minimum wage but are not covered by the minimum wage law.

Over time, the number of such industries has decreased, but there are still some. They will be working for lower wages and be worse off in this case.

Become self-employed in some very small enterprise.

Again, they will presumably obtain less income and be worse off -- otherwise, we would suppose that they would have shifted before the minimum wage law was enacted.

Drop out of the labor force entirely.

Some may retire, or rely on the income of spouses or relatives, while some may drop out of the legal labor force to engage in illegal "hustling" for an income.

Become unemployed.

Unemployment is really a macroeconomic concept, but in the simplest terms people who are looking for a job and not finding one are said to be unemployed.