Minimum wage legislation isgood for those employees who remain employed after the legislation as they arenow getting higher wages as compared to before. (Mankiw, 2008) But it is bad for those employees whoget laid off (i.e. become unemployed) because the employers now find itexpensive to hire them due to the minimum wage legislation. (Besanko, David, Dranove, & Shanley, 2000) Thus, minimum wageleads to a rise in inequality. This would be explained using a hypotheticalexample. Suppose there were two people in the economy A and B who were gettingequal wages $10.
Now there is enactment of the minimum wage legislation thatemployers must pay atleast $12 wages. Due to this legislation, the employerdecided to keep employee A in his firm and lay off employee B because employeeA was better at work than employee B. Thus, now employee A earns $12 (i.e. $2higher than before) and employee B earns $0 (i.e. $10 lower than before).
Before the minimum wage legislation there was zero inequality and after theminimum wage legislation there was $12 inequality. Hence, minimum wagelegislation leads to a rise in inequality among employees. Moreover, there is awelfare loss (i.e. deadweight loss) due to minimum wage legislation. This isdepicted in the following diagram. The consumer surplus (i.
e. employer surplus)falls after the enactment of minimum wage legislation as shown in the diagramabove. This fall in surplus occurs because now the employers have to hire feweremployees and that too at higher wage rates. (Besanko, David, Dranove, & Shanley, 2000) The seller surplus(i.
e. employee surplus) falls for those employees who get laid off due to theminimum wage and rises for those who remain employed after the minimum wagelegislation. Thus, the inequality among employees and employers also widensafter the enactment of minimum wage legislation.