The minimum wage is the lowest hourly wage rate that firms may legally pay their workers. Proponents favor higher minimum wages to ensure low-income workers a "decent" standard of living. Opponents counter that higher minimum wages cause increased unemployment, particularly among unskilled minority teenagers.

Minimum Wages in the United States The federal minimum wage started in 1938 at 25 cents an hour, about 40 percent of the average manufacturing wage at the time. Typically, its level has stayed at about 40 to 50 percent of average manufacturing wages. After holding the minimum wage at $5.15 per hour from 1997 to 2007, Congress enacted a series of phased increases in the hourly minimum wage, effective on July 24 of each year, to $5.85 in 2007, $6.55 in 2008, and $7.25 in 2009. Many states and cities have their own minimum wage laws that exceed the federal minimum. A number of municipalities refer to their minimum wage rules as "living wage" laws. Governments of these municipalities seek to set minimum wages consistent with living standards they deem to be socially acceptable?that is, overall wage income judged to be sufficient to purchase basic items such as housing and food.

Economic Effects of a Minimum Wage What happens when the government establishes a floor on wages? The effects can be seen in Figure 4-5. We start off in equilibrium with the equilibrium wage rate of We and the equilibrium quantity of labor equal to Qe. A minimum wage, Wm, higher than We, is imposed. At Wm, the quantity demanded for labor is reduced to Qd, and some workers now become unemployed. Certain workers will become unemployed as a result of the minimum wage, but others will move to sectors where minimum wage laws do not apply. Wages will be pushed down in these uncovered sectors.

Wage Rate per Unit Reduction in quantity of labor dem anded Quantity of Labor per Time Period Excess quantity supplied at wage Wm Increase in quantity of labor supplied