A minimum wage set above the equilibrium wage rate creates
A) efficiency because it increases most workers' wages.
B) efficiency because few workers lose their jobs.
C) efficiency because workers can earn a living wage.
D) inefficiency and a deadweight loss.
E) inefficiency because it creates excessive employment.

Question

Quizplus · Accepted Answer

Setting a minimum wage above the equilibrium wage rate creates inefficiency in the labor market because it creates a surplus of labor (i.e. unemployment) as more people are willing to work at the higher wage but fewer employers are willing to hire at that wage. This leads to a deadweight loss as the economy is producing less output than it otherwise could with a competitive labor market. Additionally, employers may respond to the higher wage by cutting back on hours or other benefits, which can offset the gains for some workers.

A Minimum Wage Set Above the Equilibrium Wage Rate Creates