Minimum wage – definition

A minimum wage is the lowest level of pay that is legally allowable. It is set as an hourly rate, given that setting a weekly or monthly rate would be impossible as not everyone works the same number of hours in a week or a month.

Minimum wage

The effect can be shown in the minimum wage graph, with demand contracting from e to e1, and supply extending from e to e2. Hence, the probability is that there will be an excess of supply of labour over demand.

However, a minimum rate will have no effect on labour markets where the going market wage rate is higher than the minimum.

Constraints on the minimum wage

Also, the wage elasticity of demand for labour and the wage elasticity of supply of labour can be such that the impact is very small.