Minimum wage, as a kind of price floor, refers to the least amount of money that employers can legally pay labors for per hour of work. Therefore, government sets a price that is under the market equilibrium price in order to reduce the poverty and ensure that young employees and minority will not be treated unequally. However, those aimed goals are not accomplished as expected and minimum wage only makes economy inefficient and worsens some peoples lives. After the minimum wage is imposed above the equilibrium wage rate, this results in the supply of labour being greater than the demand for labour. Therefore, while only E2 amount of labour is demanded in the market, E3 amount of labour is provided and causes excess labour.
In theory, the minimum wage results in excess supply of labour because the higher costs of labour motivate companies to cutoff employees and then cause unemployment, ceteris paribus. Meanwhile, the minimum wage reduces the demand from E1 to E2 so this reduces both consumer and producer surplus, and creates a deadweight loss to the society. Furthermore, it is highly possible that because of the increased production costs, the quantity of supply is increased and the average price level is increased overall, so consumers tend to pay higher prices. Therefore, when price floor is imposed, deadweight loss and excess supply of labour are created, and unemployment rates and overall price level will be increased. Subsequently, although there are considerable large amounts of people are benefited from the minimum wage, those poor people without enough professional skills or in the state of unemployment are likely to suffer worser living conditions.
While those people in employment are benefited from the minimum wage, they are also affected by minimum wage negatively, like less opportunities to increase income. Since the minimum wage increases production costs of company, except cutting off labour, companies would also decide to reduce times to promote employees. Therefore, in the long run, those employees will be demotivated and then decrease their passion and working efficiency. Besides, even if those employees still get lots of opportunities, their living standards will not be enhanced so much because the overall price is also increasing. Therefore, although people enjoying minimum wage have higher wages, they need to pay more when consuming goods in daily life.
In conclusion, although minimum wage ensures the salary of some people in the short run, minimum wage creates welfare loss and excess labour in the market, so in the relatively long run, unemployment rate and overall price level will be increased due to increased production costs (which are consist of labour, land, technology and capital). Therefore, for people in the state of unemployment, they will suffer by the higher price and they will be poorer. While for those people benefited by the minimum wage, they tend to obtain less promotion chances, receive higher average prices in the market and in the long run even may lose enthusiasm for working hard.