Impact of implication of minimum wages: the perspective of construction industries.

Based on a simple figure by Thomas Werner 2013, show the impact of implication of minimum wages. In the figure 1 where the details of the following is represent, the (perfectly competitive) labour market with the respective (perfectly competitive) goods market and a very fundamental production function in a scheme of three quadrants. In the upper left diagram (1^st quadrant), we have depicted a traditional production function (with decreasing marginal returns) in a sector which is eligible for minimum wage legislation.

In the “base run” of Figure 1, we assume perfect competition in the concomitant goods market. The respective supply and demand curves are well behaved” (see upper right diagram, 2^nd quadrant). Their intersection explains the equilibrium output Y and price level P in the initial situation. Equilibrium output, which is shown in the upper left quadrant (1^st quadrant), goes along with equilibrium employment L,the latter is the result of the intersection of labour demand and labour supply in the lower quadrant (3^rd quadrant).

By introducing a binding minimum wage wmin rate into the labour market, employers will reduce employment accordingly, production will shrink and the sectorial supply SS curve will be shifted to the right. The resulting excess demand on the goods market will lead to a new and higher price Pmin. Notice that the higher price will now increase the marginal product of labour in terms of value (i.e. labour demand) and will shift the respective curve LD in the lower quadrant to the right LD’ with the result that we achieved the level of employment Lmin and the new output level Y min. (Thomas Werner 2013)