This essay will look at the minimum wage and its effect on both employers and employees. We will then look at the demographic of employees affected and how the existence of a minimum wage affects these employees. An increase in the minimum wage also has flow on effects on both employers and employees and affects consumer demand. Finally, we will look at the morality of the minimum wage and its’ interaction with the welfare system.
What is a minimum wage?
A minimum wage is the setting of a price floor. In economic terms, a price floor means that a price (in this case a wage) has been set at a higher level than the equilibrium setting of the market. This is shown diagrammatically in Figure 1.
In a competitive market, the equilibrium wage rate
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This is reflected in the dead weight loss that occurs as a result of the minimum wage. The dead weight loss is representative of the lost gains from workers willing to work below the minimum wage and the lost employers who were willing to buy labour below the minimum wage. Levin-Waldman (2009) emphasises and explains this inefficiency: “A wage floor is considered to be inefficient because it prevents the costs of labour from dropping below the minimum. A policy that artificially raises wages to help some at the expense of others is inefficient because an economy forced to lay workers off because wages have been artificially inflated is not utilizing its full labour capacity. In a competitive market, each worker receives the value of his or her marginal revenue product- the amount of increase in the output revenue that results from an increase in a given unit of labour. As the costs of labour rise, firms will hire fewer workers, and employment will decline-either because firms will lay off workers in response to increased costs, thereby creating a dis-employment effect, or because a higher wage induces more workers to enter the labour market and chase the same number of jobs”. (Levin-Waldman,