How does a minimum wage affect labour markets?

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Economists argue that minimum wages affect labor markets by creating surpluses of labor.  In other words, minimum wages create a situation in which there are more people who want to work at the minimum wage than there are employers who are willing to hire.

When a government imposes a minimum wage, the wages for the least-skilled workers in an economy rise.  Their employers are now required to pay them more than they would pay them if wages were set by the market.  When wages go up, more people want to work because they get paid more to work.  However, when wages go up, employers want to hire fewer people.  Higher wages create a situation in which employers must either cut the amount of hours that they pay workers for or they must raise prices.  Fearing a loss of customers if they raise prices, they tend to cut hours.

Therefore, minimum wages typically end up causing some degree of a surplus of labor.  For this reason, economists typically believe that minimum wages can be harmful to those at the lower end of the labor market.

 

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