Suppose there are two labor markets in a perfectly competitive industry; one regulated by the minimum wage and one not (not all firms have to follow a federally mandated minimum wage). Draw two graphs in equilibrium without regulation. If a binding minimum wage in placed in one market, show what happens to the quantity traded in that market and the wage and quantity in the unregulated market

Minimum binding wage creates excess supply in regulated labour market

Unregulated Wage market has usual equilibrium where market demand for labour = market supply of labour

Explanation:

Unregulated markets are at equilibrium where market demand = market supply & demand, supply curves intersect. Market demand & market supply for labour are upward & downward sloping respectively, due to their respective positive & negative relationship with wage.

If price (wage) is more than equilibrium wage rate, excess demand creates competition among buyers & reduces wage rate. If price (wage) is less than equilibrium wage rate, excess supply creates competition among sellers  & reduces wage rate.

Minimum wage set federally , is called Price [Wage] Floor. It is binding, if it is set above the equilibrium wage rate. It is usually kept to protect interest of sellers (employees here). This wage floor > equilibrium wage rate, creates excess supply in the labour markets, as supply is directly & demand is inversely related to wage rate.

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