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Premium experiment • binding wage floor

ECONOMICS • LABOR ECONOMICS

Minimum Wage, Employment & Surplus

Move a minimum wage above and below the market wage to see employment, labor supplied, unemployment and deadweight loss respond.

● LABOR PRICE FLOORlabor demand ↔ labor supply
Employment
Unemployment
Market wage
Deadweight loss

Reasoning inspector

live model state
Competitive wage—
Employment—
Labor demanded—
Labor supplied—
Unemployment—
Deadweight loss—

Experiment with the mechanism

A minimum wage matters in the model only when it sits above the competitive wage. A binding floor raises the wage paid on remaining jobs while reducing labor demanded and increasing labor supplied, creating a gap between workers seeking jobs and jobs available.

LEARN WITH THE SIMULATION

Understand Minimum Wage, Employment & Surplus by experimenting.

START HERE

A minimum wage is a legal floor on the wage. In a competitive labor-market diagram it affects the market only when the floor is above the equilibrium wage. A binding floor raises the wage paid on jobs that remain, reduces labor demanded, increases labor supplied, and creates a gap between workers seeking work and jobs available.

BUILD THE IDEA

What you should understand first

  • Identify whether a minimum wage is binding or nonbinding.
  • Distinguish employment from labor supplied and unemployment created by the quantity gap.
  • Connect the reduction in employment to lost mutually beneficial matches in the simplified market.

TRY IT YOURSELF

What changes when the minimum wage moves from just below to just above the market wage?

  1. Set the minimum wage below the competitive wage and record employment.
  2. Move the floor slightly above the competitive wage.
  3. Replay the labor-market sequence.
  4. Compare labor demanded, labor supplied, unemployment and deadweight loss.
Read the visual:

A floor below equilibrium does not change the market outcome. Once the floor becomes binding, the model shows fewer jobs demanded, more workers willing to supply labor, and a positive unemployment gap.

WHY IT WORKS 01

Why a floor can create two different quantities

At the controlled wage, employers move along the labor-demand curve and choose fewer workers, while workers move along the labor-supply curve and offer more labor. Because the wage is prevented from adjusting back to the market-clearing level, the two quantities no longer coincide. Actual employment is limited by labor demanded in this simplified competitive setup.

WHY IT WORKS 02

The incidence depends on market structure

The competitive diagram is a useful benchmark, but it is not the only labor-market model. If employers possess wage-setting power, a higher minimum wage can sometimes raise both wages and employment over part of the range. Search costs, turnover, hours, benefits and productivity responses can also change the result, which is why the simulation should be read as a mechanism model rather than a universal forecast.

DO NOT MIX THESE UP

Common misconception

The simple competitive model does not establish that every real minimum-wage increase must reduce employment by the amount shown. Search frictions, monopsony power, worker productivity, hours, compliance, sector differences and dynamic adjustment can materially change real outcomes.

PRACTICE CHALLENGE

Can a minimum wage be numerically high but still have no effect in the model?

  • Raise the labor-demand intercept so the competitive wage becomes high.
  • Set a minimum wage that looks large in absolute terms but remains below the new equilibrium.
  • Replay the stages and inspect the binding status.
  • Explain why the legal floor matters only relative to the market-clearing wage.
Reveal the reasoning

Yes. A price floor constrains the market only when it is above the equilibrium price. If the competitive wage is even higher, firms and workers already trade at a wage above the legal floor, so the floor does not alter employment, labor supplied or the model's equilibrium.

MODEL BOUNDARIES

What this simulation assumes

Every simulation simplifies reality or a mathematical system. These are the assumptions and limits to keep in mind while interpreting the results.

Model assumptions

  • Labor demand and labor supply are linear and competitive.
  • A minimum wage affects the market only when it exceeds the competitive wage.
  • Employment under a binding floor is limited by labor demanded at the controlled wage.

Model limitations

  • Monopsony, search frictions, hours, benefits, compliance, productivity effects and heterogeneous workers are omitted.
  • The simulation is a benchmark mechanism, not a universal empirical prediction about minimum-wage policy.

CONNECT IT

Where this matters

  • Labor economics
  • Price-floor analysis
  • Employment policy
  • Supply and demand reasoning

WORDS THAT MATTER

Key vocabulary

Binding floor
A minimum wage set above the competitive market wage.
Labor demanded
The quantity of labor employers wish to hire at a given wage.
Labor supplied
The quantity of labor workers wish to offer at a given wage.
Unemployment gap
The model difference between labor supplied and employment under a binding floor.