Principles of Microeconomics / Unit 3 MIC 0211 worked example, 60 to 90 seconds
Is the Minimum Wage Binding?
The idea
A minimum wage matters only where it sits above the equilibrium wage for the workers it covers. Compare the two. Below the equilibrium, the floor is not binding and employment stays at equilibrium; many jobs already pay more than the minimum. Above it, read the quantity of labor firms demand at the floor, which is employment, and the quantity offered, which is larger; the gap is the surplus. Then note that the higher the floor sits above equilibrium, the larger the gap.
In practice
Worked example: low-skill labor in a city clears at eleven dollars with twelve thousand jobs. A floor of ten dollars is below that, so nothing changes. A floor of twelve dollars binds: firms want eleven thousand two hundred workers and thirteen thousand offer, a surplus of one thousand eight hundred, and employment falls by eight hundred. A floor of fifteen dollars binds harder: eight thousand five hundred wanted, fifteen thousand five hundred offered, a surplus of seven thousand.
Where people slip
Two cautions. The market that matters is the one the floor covers, low-skill labor, not all labor; a floor far below the average wage can still bind for teenagers. And the surplus is not the job loss: employment fell by eight hundred in the second case while the surplus was one thousand eight hundred, because the higher wage also drew in new job-seekers.
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