What is a minimum wage and how it affects the demand and supply?
A minimum wage is a minimum wage that employers can pay per hour for an employee to work for their company. In 2017, the UK minimum wage was set at £7.50 an hour for workers over 25. Higher wages increase incomes and can cause higher consumer spending as they have more disposable income available to spend. Employers cannot legally undercut the current minimum wage rate per hour which means that there is a danger a higher minimum wage may cause higher unemployment, which would cause lower economic growth. This applies both to full-time and part-time workers.
If workers receive a pay increase, then there will be a rise in consumer spending. Low-income workers are likely to spend a higher percentage of their money on rent and will have the less disposable income to spend on goods in which they may not really need. This could mean that a multiplier effect may occur since higher spending causes knock-on effects in the economy and economic growth may occur.
However, since trying to find employment is competitive the minimum wage will lower employment. This then means that unemployment will rise, and this will have a negative impact on demand as people who become unemployed would spend less, leading to lower demand. The market equilibrium wage is at W1 where the demand to equal to supply which is.
If the minimum wage is set at a high price per hour, there will be an excess supply of labour because the supply of labour will expand which means that more workers will be willing to work and will be able to offer themselves for work at the higher minimum wage than before but there is a risk that the demand for workers from employers will contract if the minimum wage is introduced as the price may be too high for certain small businesses to hire more people, it could also mean that more employees could be laid off at the wage increases some businesses may not be able to pay their staff wages.