In a competitive market, a higher minimum wage is likely to...

• A. Reduce employment or create unemployment if set above equilibrium; may raise prices to cover higher labor costs.
• B. Have no effect on employment and prices.
• C. Always increase employment.
• D. Decrease prices.

Answer: (A)

In a competitive labour market, wages are set where the demand for workers equals the supply of workers. If the government sets a minimum wage above that level, it creates a wage floor that is higher than the market-clearing wage. This leads to an excess supply of labour—unemployment—because more people are willing to work at that higher wage than there are jobs available. At the same time, higher wage costs for firms can push prices up as they try to cover the extra cost, especially in industries with less flexibility to cut other costs. So the likely outcomes are higher unemployment and potentially higher prices to cover the cost of labor. The other options don’t fit because a wage above equilibrium doesn’t imply no effect, nor does it guarantee more employment or lower prices.