Final answer:
A significant increase in minimum wage above the equilibrium creates a surplus of labor, potentially causing unemployment. This occurs as the raise leads to more workers at the new wage rate than the number employers are willing to hire. The market adjusts differently depending on how the new minimum wage compares to the equilibrium wage.
Step-by-step explanation:
Impact of Minimum Wage Increase on the Labor Market
When a government raises the minimum wage significantly above the equilibrium wage, it creates a price floor in the labor market. For example, if the minimum wage is increased from $7.35 to $15.00 per hour when the market equilibrium wage is $10.00 per hour, this results in a surplus of labor. The quantity of labor supplied by workers at this higher wage is greater than the quantity of labor demanded by employers, which can lead to an excess supply of labor, or a labor surplus. Consequently, some workers who are willing to work at the new minimum wage may not find employment. Conversely, when the previous minimum wage was $7.25 and the equilibrium wage was $10.00, there was no surplus or shortage since the minimum wage did not bind.
Arguments for increasing the minimum wage to $15.00 often cite the need for a living wage that ensures a reasonable standard of living. However, opponents argue that such an increase would reduce the quantity demanded of low-skilled labor, leading to unemployment for some workers. The impact of the change depends on how the new minimum wage compares to the market equilibrium.