Minimum Wage

Definition

Minimum wage is the lowest hourly rate that employers can legally pay their workers. It is a government-mandated price floor in the labor market, intended to protect low-wage workers and ensure a minimum standard of living.

5 Must Know Facts For Your Next Test

1. Minimum wage is a policy tool used by governments to address income inequality and ensure a minimum standard of living for low-wage workers.
2. Raising the minimum wage can lead to a decrease in employment as employers may be less willing to hire workers at the higher wage rate.
3. The impact of minimum wage on the labor market depends on the elasticity of labor demand, with more elastic demand leading to greater job losses.
4. Minimum wage can distort the equilibrium in the labor market, creating a surplus of labor (unemployment) if set above the market-clearing wage.
5. Proponents argue that minimum wage helps reduce poverty and income inequality, while critics claim it leads to job losses and higher unemployment.

Review Questions

• Explain how minimum wage acts as a price floor in the labor market.
  • Minimum wage is a government-imposed price floor in the labor market, meaning it sets the lowest legal hourly rate that employers can pay their workers. This price floor prevents the market-clearing wage from falling below the mandated minimum, leading to a surplus of labor (unemployment) if the minimum wage is set above the equilibrium wage rate. The impact on the labor market depends on the elasticity of labor demand, with more elastic demand resulting in greater job losses due to the minimum wage.
• Describe the relationship between minimum wage and income inequality.
  • Minimum wage is often used as a policy tool to address income inequality by ensuring a minimum standard of living for low-wage workers. By setting a floor on the hourly rate, minimum wage can help raise the earnings of the lowest-paid workers, potentially reducing the gap between the highest and lowest incomes in the economy. However, critics argue that minimum wage can also lead to job losses, potentially offsetting the intended benefits and exacerbating income inequality. The overall impact on income inequality depends on the specific economic conditions and the level at which the minimum wage is set.
• Analyze the short-run effects of changes in the minimum wage on unemployment.
  • $$\text{Changes in the minimum wage can have significant short-run effects on unemployment levels. When the minimum wage is raised, it creates a surplus of labor in the market, as the new, higher wage rate exceeds the market-clearing equilibrium wage. Employers may respond by reducing the number of workers they are willing to hire, leading to an increase in unemployment. The magnitude of this effect depends on the elasticity of labor demand - if demand is more elastic, the increase in unemployment will be greater. Conversely, if labor demand is inelastic, the impact on employment may be smaller. In the long run, other adjustments, such as changes in prices, productivity, and the composition of the workforce, may occur, but in the short run, minimum wage hikes can lead to higher levels of unemployment.}$$

Related terms

Price Floor:

A government-imposed minimum price that must be charged for a good or service, preventing the market price from falling below that level.

Labor Market:

The market where the demand for labor (by employers) meets the supply of labor (by workers).

Income Inequality:

The unequal distribution of income and wealth within a population or country.