A binding minimum wage, set above the equilibrium wage, can lead to a surplus of labor supply, resulting in unemployment. In this scenario, the market clears through adjustments in other factors, including the following:
- Reduced Hiring: Employers may choose to hire fewer workers due to the increased cost of labor. This leads to a mismatch between the number of available jobs and the number of job seekers.
- Increased Automation: Businesses might invest more in technology or automation to replace higher-wage workers, effectively reducing the demand for labor.
- Informal Employment: Some employers may move operations underground, paying workers off the books to avoid complying with the minimum wage law.
- Changed Workforce Composition: Higher wages might attract more qualified candidates, but some lower-skilled workers could be excluded from the workforce entirely.
Ultimately, the market clears through a combination of reduced job opportunities for lower-skilled workers, shifts in hiring practices, and the emergence of alternative employment arrangements, all adjusting to the constraints imposed by the minimum wage.