IBonomicsMinimum Wage – Labour Market EffectsSL
MicroeconomicsThis diagram shows how a government-imposed minimum wage above the equilibrium wage causes excess supply of labour, resulting in unemployment.
Curves and elements
- adl
- ADL: Aggregate demand for labour, downward sloping as higher wages discourage hiring.
- asl
- ASL: Aggregate supply of labour, upward sloping as more workers are willing to work for higher wages.
- wm
- Wm: Minimum wage set by the government, above the market equilibrium wage.
- we
- We: Equilibrium wage where ADL intersects ASL.
- ld
- Ld: Quantity of labour demanded at the minimum wage level.
- ee
- Ee: Employment level at market equilibrium (We).
- ls
- Ls: Quantity of labour supplied at the minimum wage level.
- unemployment
- Unemployment: The gap between Ls and Ld caused by the wage floor.
Key explanations
- 1
The equilibrium wage is at We, where the demand for labour (ADL) equals the supply of labour (ASL), and employment is at Ee.
- 2
A minimum wage Wm is introduced above We, setting a legal floor below which wages cannot fall.
- 3
At Wm, more workers are willing to work (Ls) due to the higher wage, but firms demand less labour (Ld), creating a surplus of labour.
- 4
This surplus represents unemployment, which is the horizontal distance between Ls and Ld.
- 5
Minimum wages aim to increase incomes for low-skilled workers but may lead to job losses or informal employment if set too high.
Example exam question
Using a labour market diagram, explain the impact of a government-imposed minimum wage on employment and unemployment.
Show example answer
The diagram shows that a minimum wage set above the equilibrium (Wm > We) leads to a higher quantity of labour supplied (Ls) than demanded (Ld), creating unemployment. The level of employment falls from Ee to Ld, while the gap between Ls and Ld represents the number of people unemployed.
