What a minimum wage does on the labor market graph
On a test, the minimum wage question looks like a gift: draw one horizontal line and you are done. Then the marks go. The line is drawn under the equilibrium, where it does nothing. Or the gap between the curves is called "jobs lost", when only half of it is. The graph is simple, but it must be read in the right order.
The graph in one minute
The labor market graph is the supply and demand graph with two words changed. The vertical axis is the wage, the price of a day of work. The horizontal axis is the number of workers. Demand comes from employers: in Lesson 9 an orchard hires a picker only while the extra baskets that picker brings in are worth more than the wage, so demand slopes down. Supply comes from workers: more people offer their time as the wage rises, so it slopes up.
In the lesson's regional market for apple pickers, demand is W = 600 − 60L and supply is W = 60L, with W the wage in dollars a day and L the workers in thousands. The curves cross at $300 and 5,000 workers: every orchard that wants a picker at $300 finds one, and every person who wants to pick at $300 finds a job.
Draw the floor above the equilibrium
The government sets a minimum wage of $360 a day: a horizontal line at $360. Nothing may happen below it, so the market cannot settle at $300 any more. Read both curves at $360, not at the crossing. Move the slider and watch the two readings come apart.
Demand at $360: orchards want 4,000 pickers. Supply at $360: 6,000 people want the job. The gap of 2,000 is a surplus of labor, which has a plainer name: unemployment, people ready to work at the going wage who cannot find an employer.
Reading the gap: half lost jobs, half new job seekers
The gap is not the number of jobs lost. Compare with the equilibrium. Jobs went from 5,000 to 4,000: 1,000 fewer. People wanting a job went from 5,000 to 6,000: 1,000 more, drawn in by the higher pay. The 2,000 unemployed are the sum of the two. "2,000 jobs lost" counts the new job seekers as fired workers.
| Minimum wage | Hired | Want a job | Unemployed | Jobs lost |
|---|---|---|---|---|
| $300 | 5,000 | 5,000 | 0 | 0 |
| $330 | 4,500 | 5,500 | 1,000 | 500 |
| $360 | 4,000 | 6,000 | 2,000 | 1,000 |
| $390 | 3,500 | 6,500 | 3,000 | 1,500 |
| $420 | 3,000 | 7,000 | 4,000 | 2,000 |
One more reading: slide the floor down to $270, below the equilibrium. Orchards already pay $300, so a law that says "at least $270" binds nobody. A floor matters only when it is above the price the market would set on its own, and that holds for any price floor.
The other graph: one employer in town
Everything above assumes many employers competing for workers, so each one takes the wage as given. Lesson 9 also shows the other case: a remote ski resort that is the only employer in its town, a monopsony (Greek for "one buyer"). To hire one more worker the resort must offer a higher wage, and pay it to everyone already on staff. So the cost of one more worker, the marginal resource cost (MRC), rises faster than the wage. The resort hires where the value of one more worker, the marginal revenue product (MRP), meets MRC: 6 workers at $160 a day, the wage read on the supply curve. A competitive market with the same curves would hire 9 at $220.
Now add the floor. With a minimum wage, hiring one more worker no longer means a raise for anyone else, as long as people will work at that wage. The floor becomes the new MRC, flat. Drag it up from $160 and watch the jobs.
Up to $220, every step of the floor adds jobs: at $220 the resort hires 9, the competitive outcome, at higher pay. Above $220 the floor is higher than what a ninth worker brings in, and jobs fall again. At $280 the resort is back to 6 workers, and 6 people who want the job cannot get it. The same line does opposite things on the two graphs, and the only difference between them is how many employers there are.
Which graph is the real one?
That is a question for data, not for the drawing. The best known test is New Jersey in 1992, when the state raised its minimum wage from $4.25 to $5.05 an hour while Pennsylvania next door stayed at $4.25. David Card and Alan Krueger counted jobs in 410 fast-food restaurants on both sides of the border, before and after, and found that jobs per restaurant in New Jersey held up compared with Pennsylvania. Later studies using payroll records disagreed, and how large a rise is too large is still debated. The strongest argument for a floor: where employers hold wages down, it raises pay without costing jobs. The strongest argument against: in a competitive market, and for big rises, the gap on the first graph is real, and firms may cut hours or raise prices. Lesson 2 of the Economic Policy course works through the numbers; this post only shows how to read the graph.
The trap on tests
- Draw the floor above the equilibrium. A minimum wage below the market wage is a line with no effect, and tests sometimes give you one to see if you notice.
- Read employment on the demand curve. Jobs are what employers want to hire at the floor, not the crossing and not the supply reading, which is how many people want a job.
- The gap is unemployment, not jobs lost. Jobs lost = equilibrium employment − demand at the floor. New job seekers = supply at the floor − equilibrium employment. The gap is the sum.
- Know which graph you are on. With one employer, the wage is read on the supply curve and the floor replaces MRC. A floor at or below the competitive wage then raises both pay and jobs; above it, jobs fall again.
Quick check
1. In a market for pickers, demand is W = 500 − 50L and supply is W = 50L (L in thousands). The equilibrium is $250 and 5,000 workers. A minimum wage of $300 is set. How many are hired, how many want a job, and how many are unemployed?
Read both curves at $300. Demand: 500 − 50L = 300, so L = 4: 4,000 hired. Supply: 50L = 300, so L = 6: 6,000 want a job. Unemployed: 6,000 − 4,000 = 2,000, of which 1,000 are jobs lost (5,000 → 4,000) and 1,000 are new job seekers (5,000 → 6,000).
2. Same market, but the minimum wage is set at $200. What changes?
Nothing. The market wage is $250, above the floor, so employers already pay more than the law requires. Employment stays at 5,000. Draw the line at $200 anyway if the question asks for it, and write that it does not bind.
3. The ski resort has MRP = 400 − 20L and labor supply W = 40 + 20L. On its own it hires 6 workers at $160. A minimum wage of $200 is set. How many does it hire now? And at $260?
At $200 the floor is the new MRC. The resort hires everyone willing to work at $200: 40 + 20L = 200, so L = 8. 8 workers at $200, more jobs and higher pay than the 6 at $160, because an 8th worker is still worth $240 to the resort. At $260 the floor is above the competitive wage of $220: the resort hires until MRP = 260, so 400 − 20L = 260 and L = 7. 7 workers, while 40 + 20L = 260 gives 11 who want the job: 4 unemployed.