Minimum wage is the lowest hourly pay that employers are legally allowed to give most workers. It matters because it affects workers' income, business costs, prices, hiring decisions, and government safety net programs. Economists often describe it as a wage floor because it sets a minimum price for labor in a market.
The debate is not only about fairness, but also about trade-offs between higher pay and possible changes in employment.
Key Facts
- Minimum wage is a legal wage floor: employers cannot pay covered workers less than this hourly rate.
- Monthly earnings from hourly work can be estimated by Earnings = wage x hours worked.
- If a worker earns 15 x 40 = $600.
- A binding wage floor is set above the market equilibrium wage and can create a surplus of labor, which is unemployment in a simple supply and demand model.
- Business labor cost can be estimated by Labor cost = hourly wage x total worker hours.
- Minimum wage effects depend on local prices, worker productivity, business profits, competition, and how strongly employers respond to higher labor costs.
Vocabulary
- Minimum wage
- The minimum hourly pay rate that employers are legally required to pay covered workers.
- Wage floor
- A minimum legal price for labor that prevents wages from falling below a set level.
- Equilibrium wage
- The wage where the number of workers employers want to hire equals the number of workers willing to work.
- Labor demand
- The amount of work employers are willing and able to hire at different wage rates.
- Labor supply
- The amount of work people are willing and able to offer at different wage rates.
Common Mistakes to Avoid
- Assuming every minimum wage increase always causes unemployment. This is too simple because real labor markets include worker turnover, business pricing power, productivity changes, and regional differences.
- Ignoring hours worked when comparing pay. A higher hourly wage does not always mean higher total income if a worker receives fewer hours.
- Confusing gross pay with take-home pay. Gross pay is earnings before taxes and deductions, while take-home pay is the amount actually received.
- Treating all businesses as affected in the same way. A large chain, a restaurant, and a small local shop may respond differently because their costs, profits, and competition differ.
Practice Questions
- 1 A worker earns $12 per hour and works 35 hours in one week. What is the worker's gross weekly pay?
- 2 A small business has 8 workers, and each works 30 hours per week. If the minimum wage rises from 13 per hour, how much more does the business spend on wages per week?
- 3 Explain why a minimum wage set above the equilibrium wage can help some workers while creating challenges for some employers and job seekers.