Does a minimum wage law cause quantity supplied to be greater than quantity demanded?

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pohnpei397's profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted on

According to economic theory, yes.  A minimum wage does cause the quantity supplied of labor to be higher than the quantity demanded.  That is assuming that the minimum wage is set higher than the equilibrium wage would be if there were no minimum wage.

To see why this is, draw yourself supply and demand curves that intersect somewhere on your graph.  Then draw in a horizontal line above the equilbrium point (where the lines cross).  If you have labeled your curves correctly, you will see that the horizontal line will cross the supply curve to the right of where it crosses the demand curve.  That indicates that (at that price) there is a higher quantity supplied of labor than quantity demanded.

Cut and paste this link to see an exmple.  (For some reason I can't paste this in where I'm supposed to put a link...)

http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=monopsony,+minimum+wage

krishna-agrawala's profile pic

krishna-agrawala | College Teacher | (Level 3) Valedictorian

Posted on

Minimum wage law specifies a minimum floor levels for rates of wages to be paid by employers to their employees for different types of jobs. We can expect that this law to some extent increases the demand for goods and services in an economy by increasing the income of the some of the consumers benefiting from the minimum wages law. However, the quantity supplied or produced is a function independent of the rate of wages. It is more a function of the number of people employed and their productivity. Because of this it is highly unlikely that minimum wages will increase quantity demanded more than quantity, in spite of minimum wages employees are not likely to pay their employees more than what they produce. The employees would prefer not to employ people at wages that are more than the value created by them, rather than employ them and make losses. The only impact of minimum wages law is to transfer a part of purchasing power from employers to the employees.

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