W4P3 - Minimum Wage

Question 1

What is the effect on the labour market of a minimum wage that is lower than the
equilibrium wage?

Answer 1

Imagine a diagram showing a minimum wage that is set below the market clearing
wage w0. In this case the minimum wage w1 is non-binding and the market would clear at the original market clearing wage w0 with zero involuntary unemployment. Note that even though labour supply and labour demand are both at L0 we would still observe voluntary unemployment i.e. people who choose not to work at the equilibrium wage
w1.

L is on the horizontal axis, W/P is on vertical.
Horizontal NPW line is w1, there is a downward sloping Ld line and upward sloping Ls line.
Ld and Ls intersect at point A (L0,W0)
Ls and NMW line intersect at point B (left of L0, w1)
Ld and NMW line intersect at point C (right of L0, w1)

Question 2

What is the effect on the labour market of a minimum wage that is higher than the
equilibrium wage?

Answer 2

Imagine a diagram showing a minimum wage w1 that is set above the market clearing wage w0. In this case the minimum wage is binding which implies
that legally no one can be employed below the minimum wage. At this
minimum wage w1 the labour supply by workers is higher than what
is demanded by firms at this wage. The difference between labour supply and labour demand at that wage is involuntary unemployment. It
is involuntary as for the minimum wage w1 some workers would be
willing to work, but they are unable to find any work.

L is on the horizontal axis, W/P is on vertical.
Horizontal NPW line is w1, there is a downward sloping Ld line and upward sloping Ls line.
Ld and Ls intersect at point A (L0,W0)
Ld and NMW line intersect at point B (left of L0, w1)
Ls and NMW line intersect at point C (right of L0, w1)
points look like upside down triangle