A Minimum Wage Is a Price Floor Above the Equilibrium Wage

1. A national minimum wage is a price floor set above the equilibrium wage.
2. In a competitive market, a binding floor can create excess supply of labour.
3. In a monopsony, it can raise both the wage and employment.

The Effect Differs in Competitive and Monopsony Markets

1. In a competitive market, the floor leaves supply above demand, so jobs are lost.
2. The size of any job loss depends on the elasticity of labour demand.
3. In a monopsony, the floor can offset the employer's wage-cutting power.

Whether a Minimum Wage Costs Jobs Depends on the Market

1. For: it can cut poverty, sharpen incentives and raise productivity.
2. Against: it may cost jobs, raise costs and add cost-push pressure.
3. The employment effect turns on labour demand elasticity and market structure.
4. On balance, a minimum wage need not raise unemployment, and its effect depends on elasticity and whether the market is competitive or monopsonistic.

Draw Both Market Types

Worked Example: A Minimum Wage in a Competitive Market

1. In a competitive local market for cafe staff, the equilibrium wage is £9\pounds 9£9/hour with $10,000$ workers employed.
2. The government sets a minimum wage of £11\pounds 11£11/hour, above equilibrium.
3. At £11\pounds 11£11/hour, cafes move up their demand curve and cut the quantity of labour demanded to $9,000$, a loss of $1,000$ jobs ($10\%$).
4. At the same wage, more workers want jobs, so quantity supplied rises to $11,000$.
5. The excess supply of labour $=11,000-9,000=$ $2,000$ workers who want a job at £11\pounds 11£11/hour but cannot find one, i.e. classical unemployment.

Worked Example: A Minimum Wage Against a Monopsony Employer

1. A regional care home group is the dominant local employer of care workers, a monopsonist paying £9\pounds 9£9/hour and employing $8,000$ staff.
2. The competitive wage and employment level, where supply would meet demand in this market, is £11\pounds 11£11/hour and $9,500$ staff.
3. The government sets the minimum wage at £11\pounds 11£11/hour, matching the competitive rate.
4. The employer must now pay £11\pounds 11£11/hour to hire any worker, so its incentive to restrict hiring in order to hold down the wage bill disappears; employment rises to $9,500$ as it hires up to where the new horizontal wage floor meets MRP.
5. Both the wage (£9→£11\pounds 9 \rightarrow \pounds 11£9→£11) and employment ($8,000\to 9,500$) rise together, the opposite of the competitive-market result above.

Describing the Two Minimum Wage Diagrams

1. Competitive market diagram: axes show the wage rate (W) vertically and quantity of labour (QL) horizontally; the downward-sloping demand curve (D) and upward-sloping supply curve (S) cross at the equilibrium wage We and quantity Qe.
2. Draw a horizontal minimum wage line above We; where it crosses D gives the (lower) quantity demanded, and where it crosses S gives the (higher) quantity supplied.
3. Shade or bracket the horizontal gap between these two points at the minimum wage line: this is the excess supply of labour, i.e. unemployment caused by the floor.
4. Monopsony diagram: draw the upward-sloping supply curve (S), a steeper marginal cost of labour curve (MCL) above it, and the downward-sloping demand curve (D = MRP); without intervention, employment is where MCL meets MRP, with the wage read down to S, below the competitive wage.
5. Add a horizontal minimum wage line at the competitive wage (where S would cross D): from the point it meets S, it becomes the new effective supply and MCL curve, and the original upward-sloping S and MCL resume only beyond that point.
6. Employment rises to where this new horizontal segment meets MRP, at the competitive quantity; if the minimum wage line were drawn higher still, it would cross MRP further left, at a lower quantity, showing job losses even in monopsony once the floor is set too high.