Minimum wage legislation is
good for those employees who remain employed after the legislation as they are
now getting higher wages as compared to before. (Mankiw, 2008) But it is bad for those employees who
get laid off (i.e. become unemployed) because the employers now find it
expensive to hire them due to the minimum wage legislation. (Besanko, David, Dranove, & Shanley, 2000) Thus, minimum wage
leads to a rise in inequality. This would be explained using a hypothetical
example. Suppose there were two people in the economy A and B who were getting
equal wages $10. Now there is enactment of the minimum wage legislation that
employers must pay atleast $12 wages. Due to this legislation, the employer
decided to keep employee A in his firm and lay off employee B because employee
A was better at work than employee B. Thus, now employee A earns $12 (i.e. $2
higher than before) and employee B earns $0 (i.e. $10 lower than before).
Before the minimum wage legislation there was zero inequality and after the
minimum wage legislation there was $12 inequality. Hence, minimum wage
legislation leads to a rise in inequality among employees.
Moreover, there is a
welfare loss (i.e. deadweight loss) due to minimum wage legislation. This is
depicted in the following diagram.
The consumer surplus (i.e. employer surplus)
falls after the enactment of minimum wage legislation as shown in the diagram
above. This fall in surplus occurs because now the employers have to hire fewer
employees and that too at higher wage rates. (Besanko, David, Dranove, & Shanley, 2000) The seller surplus
(i.e. employee surplus) falls for those employees who get laid off due to the
minimum wage and rises for those who remain employed after the minimum wage
legislation. Thus, the inequality among employees and employers also widens
after the enactment of minimum wage legislation.