At the mandated $7.00 minimum wage, there is an 8 million surplus of labor as demand (4 million) is less than the supply (12 million), causing unemployment due to the wage hike.
On a graph where the x-axis represents the quantity of labor and the y-axis represents the wage rate, plot the points (4 million, $7.00) and (12 million, $7.00). Additionally, mark the point (8 million, $5.00) to represent the equilibrium where demand equals supply at the market wage.
The surplus of labor at $7.00 occurs because the government-mandated minimum wage exceeds the market equilibrium wage. At $7.00, the quantity of labor demanded (4 million) is less than the quantity supplied (12 million), resulting in an 8 million surplus.
This surplus represents individuals willing to work at the higher minimum wage but are unable to find employment because the demand at that wage level is lower than the supply. The gap between the demand and supply curves at the $7.00 wage level illustrates the inefficiency introduced by the minimum wage policy.