Minimum Wage from the perspective of Labour Force:
Minimum wage has the maximum impact on employment. This concept can be graphically explained.
From the above diagram, when the labour and product market are perfectly competitive, the equilibrium wage in the market is at the intersection of the supply and demand curve. At wage w, the corresponding employment level at L , is the point where the supply of labour is equal to the labour demanded. Now, if minimum wage is implemented, setting it above it equilibrium wage, the new wage is at mw, leading to a decline in employment with the demand for labour falling from L to Lmw. This can be explained by two distinct mechanisms. The minimum wage price floor has increased the firm’s cost of production. In
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According to simple economics, rise in the price of the product reduces the demand for that product. When demand for the product falls, the producer cuts down on production so he doesn’t oversupply, which leads to a decreased demand for labour (this phenomenon is called the Scale Effect). As a response to the higher cost of labour due to the implementation of minimum wage, the firm will try to optimise its production process by moving their mix of inputs from labour to other inputs (this is known as Substitution Effect). It will also try to substitute away its low skill workers with high skill workers since their jobs are not affected by the minimum wage (this is known as Labour-Labour substitution). The combined effect of all these mechanisms results in lesser job opportunities for low skilled workers, increasing unemployment (Wascher W. , 2015). In the real scenario it is noticed that