A binding minimum wage in a competitive labor market creates unemployment.

Question

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In a competitive labor market, employers will only hire workers whose productivity can justify their wage. If the government sets a minimum wage above the equilibrium wage, it creates a surplus of labor (i.e. unemployment) because the quantity of labor supplied exceeds the quantity demanded at that price. Employers may also choose to substitute lower skilled workers with capital or automation to offset the increased labor costs, further exacerbating unemployment.

A Binding Minimum Wage in a Competitive Labor Market Creates