A minimum wage establishes a minimum hourly wage set by the government. A minimum wage is an example of a price floor.
Most economists and the Congressional Budget Office believe increasing the minimum wage would increase unemployment. When the minimum wage is set above the market wage, more workers would enter the workforce. The higher wage would reduce the number of workers demanded by employers. The gap between willing workers and employed workers would widen - increasing unemployment. Only those employees retaining their jobs would be helped by an increase in the minimum wage. Those seeking but unable to find work would find it more difficult. Employees who lose their jobs from layoffs precipitated by the increase would not benefit. Costs would increase for employers. Consumers may also pay when companies increase their prices in response to their increase in costs. Watch the video to see how an increase in the minimum wage impacts Ron's Deli.
The supply and demand graph below illustrates how a minimum wage can increase unemployment. The equilibrium wage is $7,00 per hour. A minimum wage of $7.50 is established. At $7.50, employers would hire 2.75 million workers (A on the graph below). Unfortunately, 250,000 workers are laid off. Meanwhile, the higher wage attracts 150,000 more workers. The total unemployed is now 400,000, the 250,000 who lose their job plus the 150,000 who enter the work force.
A few economists disagree with this analysis. They think an increase in the minimum wage would increase employment because the increase in worker income would increase the total demand for goods and services. Producers would have to employ additional workers to meet this increase in demand. The key to this argument is the quantity demanded of low-skilled workers would not drop substantially. This would require an inelastic demand curve for labor.