What kind of unemployment is it when the minimum wage is set above the market rate causing unemployment?

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pohnpei397 eNotes educator | Certified Educator

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This question asks what kind of unemployment is caused by a minimum wage.  The first answer does not address this issue.  The first answer does describe why a minimum wage leads to unemployment, but does not name the kind of unemployment.

The answer to this is that such unemployment is called "classical unemployment" or "real-wage unemployment."  Classical unemployment happens when the wage rate in a market is higher than is warranted by the productivity of workers.  In other words, it is what happens when an employer has to pay workers more than they are worth.  If, for example, an employer has to pay a worker $5 per hour and the worker only creates $3 per hour in marginal revenue, the employer would lay that worker off.  The worker would then be classically unemployed.

When the government sets a minimum wage, it forces employers to pay more than they would based on market forces.  If they cut their work force, they will be doing so because it is no longer profitable to employ workers at that wage.  In this case, the workers will suffer from classical unemployment.

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justaguide eNotes educator | Certified Educator

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When the minimum wage is set above the market rate it leads to unemployment. This is due to the fact that employers would now not want to hire as many people as they did earlier. As they have to pay a higher amount to each person that is hired, their intention would be to hire only from the group of workers that can do more work and in a better way. That would allow the employers to have the original amount of work done by a smaller group of workers.

This type of unemployment is very similar to the case where if the cost of a commodity is fixed at price much lower than the price of the commodity in a free market it reduces the number of suppliers and creates a shortage of the commodity in the market.

As far as minimum wages are concerned, keeping them at an elevated price reduces the demand for workers among employers.

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