Minimum wages

A minimum wage $\bar w$ is the lowest hourly wage an employer may legally pay. It binds only if it is set above the wage the market would pay, $w^*$. In a competitive labour market a binding minimum wage lowers employment and creates unemployment; where employers have wage-setting power, it can raise wages and employment together.

The competitive prediction

A minimum wage is a price floor in the labour market. At $\bar w$, firms keep only the jobs whose value of marginal product covers the higher wage, so employment falls from $E^*$ to $E_D$ on the demand curve. The higher wage also draws in people who would not work at $w^*$, so the number who want jobs rises to $E_S$ on the supply curve. Unemployment is the gap $E_S - E_D$, and it has two sources:

1. Job losers, $E^* - E_D$: people employed at $w^*$ who lose their jobs.
2. New entrants, $E_S - E^*$: people who join the labour force because work now pays more, but cannot find a job.

Minimum wage

$17.00

Responsiveness of supply and demand to the wage

1.0×

Jobs lost, E^* − E_D

5.0k

New entrants, E_S − E^*

10.0k

Unemployed, E_S − E_D

15.0k

Deadweight loss (per hour)

$7.5k

Open in Graph Lab

Figure 1. A $17 minimum wage in a market that clears at $15 with 60 thousand workers. Firms cut employment to 55 thousand while 70 thousand want work: 5 thousand lose their jobs, 10 thousand new entrants find none, and 15 thousand are unemployed. The more responsive supply and demand are to the wage, the more unemployment the same minimum wage creates.

Two predictions follow. Unemployment is larger the higher the minimum wage, and the more elastic (flatter) labour supply and labour demand are. The model applies to low-skill, low-wage labour, where the floor bites, and it predicts winners and losers within that group: those who keep their jobs earn more, while those who lose them, and entrants who cannot find one, gain nothing. The triangle between the curves from $E_D$ to $E^*$ is a deadweight loss: hours that were worth more to firms than to workers and are no longer worked.

Covered and uncovered sectors

Minimum wage laws often reach only some jobs. Call the jobs the law covers the covered sector and the rest the uncovered sector. Workers who cannot get a covered job at $\bar w$ have two options.

• Take an uncovered job. Supply to the uncovered sector shifts right and the uncovered wage falls.
• Wait for a covered job. If covered jobs open up often enough, some uncovered workers quit to queue for them. Uncovered supply shifts left and the uncovered wage rises.

With free movement between sectors, people switch until the two options pay the same on average. If $\pi$ is the probability of getting a covered job, equilibrium requires

$$\pi \bar{w} = w_U,$$

where $w_U$ is the uncovered wage. Unemployment here is a queue: people wait for covered jobs because the expected reward from waiting matches what the uncovered sector pays.

Workers waiting for covered jobs (thousands)

10k

Covered jobs

35k

Waiting for covered jobs

10k

Chance of a covered job, π

78%

Expected covered wage, πw̄

$14.00

Uncovered wage, w_U

$14.00

Open in Graph Lab

Figure 2. A workforce of 100 thousand splits between a covered sector with an $18 minimum wage and an uncovered sector. Covered jobs fall from 50 to 35 thousand. In equilibrium 10 thousand wait for covered jobs: the chance of one is 35 in 45, so the expected covered wage is $14, equal to the uncovered wage.

Key idea

In a competitive market a binding minimum wage creates unemployment from two directions: jobs lost and new entrants. With an uncovered sector, workers move until the expected covered wage, $\pi \bar w$, equals the uncovered wage.

Minimum wages and monopsony

The competitive prediction assumes every employer takes the wage as given. A monopsonist, an employer facing an upward-sloping labour supply curve, pays less than the value of what workers produce and hires too few of them, because hiring one more worker means raising everyone’s pay. A minimum wage between the monopsony wage and the competitive wage removes that cost, so the firm hires more. The argument is developed in monopsony.

Minimum wage

$18.00

Employment, competitive market

60.0

Employment, monopsony

52.0

Wage the monopsonist pays

$18.00

Open in Graph Lab

Figure 3. Employment at each minimum wage when supply is $w = 5 + 0.25E$ and $VMP_E = 35 - 0.25E$. In a competitive market every minimum wage above $20 cuts employment. Under monopsony a minimum wage between $15 and $20 raises employment from 40 up to 60; above $20 the two predictions coincide.

Worked example

Labour demand is $w = 39 - 0.4E$ and labour supply is $w = 3 + 0.2E$, with $E$ in thousands of workers. The minimum wage is $17.

1. Find the equilibrium. $39 - 0.4E = 3 + 0.2E$ gives $E^* = 36 / 0.6 = 60$ and $w^* = 15$. A $17 minimum binds.

2. Find the jobs. Firms hire until demand meets the floor: $17 = 39 - 0.4E_D$, so $E_D = 22 / 0.4 = 55$.

3. Find the job seekers. $17 = 3 + 0.2E_S$, so $E_S = 14 / 0.2 = 70$.

4. Split unemployment. Job losers: $60 - 55 = 5$ thousand. New entrants: $70 - 60 = 10$ thousand. Unemployed: $70 - 55 = 15$ thousand, a rate of $15 / 70 \approx 21$ percent among people who want work at the minimum wage.

5. Measure the deadweight loss. At $E_D = 55$ the demand price is $17 and the supply price is $3 + 0.2(55) = 14$ dollars. The triangle is $\tfrac{1}{2} \times (60 - 55) \times (17 - 14) = 7.5$ thousand dollars an hour.

Exercise: the covered and uncovered sectors in Figure 2

Both sectors have demand $w = 25 - 0.2E$ and share a fixed workforce of 100 thousand, so without the law each employs 50 thousand at $15. With an $18 minimum, covered employment is $(25 - 18) / 0.2 = 35$. If $U$ thousand wait for covered jobs, the uncovered sector employs $65 - U$ and pays $w_U = 25 - 0.2(65 - U) = 12 + 0.2U$, while the chance of a covered job is $35 / (35 + U)$. Setting $18 \times 35 / (35 + U) = 12 + 0.2U$ gives $U^2 + 95U - 1050 = 0$, so $U = 10$. Ten thousand wait, 55 thousand work in the uncovered sector at $14, and the expected covered wage, $\tfrac{35}{45} \times 18$, is also 14 dollars.

Evidence

Teenagers. Most studies focus on teenagers because so many of them earn close to the minimum. In the United States in 2010, 24.9 percent of hourly-paid workers aged 16 to 19 earned the federal minimum or less, compared with 3.8 percent of those aged 25 and over.¹ The classic survey of the early literature concluded that a 10 percent increase in the minimum wage reduces teenage employment by 1 to 3 percent, an elasticity of −0.1 to −0.3, with the lower end most plausible.² For Canada, Baker, Benjamin and Stanger estimated a teenage employment elasticity of about −0.25 from provincial minimum wages; the effect comes from slow, long-run differences in minimum wages, while year-to-year changes show no negative effect.³

New Jersey and Pennsylvania. On April 1, 1992, New Jersey raised its minimum wage from $4.25 to $5.05, while the minimum in neighbouring eastern Pennsylvania stayed the same. Card and Krueger surveyed 410 fast-food restaurants in the two states before and after the increase and compared the change in employment across the border, a difference-in-differences design. They found no sign that the increase reduced employment: full-time-equivalent employment rose in New Jersey relative to Pennsylvania.⁴ The study started a long debate. Neumark and Wascher, using payroll records from a different set of restaurants, found that employment fell in New Jersey relative to Pennsylvania;⁵ Card and Krueger replied with administrative employment data and again found no relative decline.⁶

Counting jobs around the minimum. Cengiz, Dube, Lindner and Zipperer studied 138 large state-level minimum wage increases in the United States between 1979 and 2016. They compared the jobs that disappeared just below each new minimum with the jobs that appeared at or just above it. The two offset: over the five years after an increase, the number of low-wage jobs was essentially unchanged.⁷ Moderate increases appear to raise pay without the job losses the competitive model predicts. Monopsony power is one explanation; low elasticities of labour demand are another.

Minimum wages in Canada

Canada’s first minimum wage laws, passed in British Columbia and Manitoba in 1918, were meant to protect women and children.⁸ Today each province and territory sets its own general minimum wage. A separate federal rate applies to federally regulated private-sector employers, and where a provincial or territorial rate is higher, the higher rate applies.⁹

General minimum wage by province and territory

Hourly rate for adult workers in effect on 2026-10-23

Newfoundland and Labrador$16.35

Prince Edward Island$17.30

Nova Scotia$17.00

New Brunswick$15.90

Quebec$16.60

Ontario$17.95

Manitoba$16.40

Saskatchewan$15.70

Alberta$15.00

British Columbia$18.25

Yukon$18.51

Northwest Territories$17.20

Nunavut$20.17

Federal$18.15

General minimum wages on October 23, 2026. Alberta's $15.00 is the lowest; it has not changed since October 1, 2018.Source: Government of Canada, Minimum Wage Database, Current and Forthcoming General Minimum Wage Rates in Canada. Retrieved 2026-10-23.

Show the data and notes

In effect since: Newfoundland and Labrador $16.35 (2026-04-01); Prince Edward Island $17.30 (2026-10-01); Nova Scotia $17.00 (2026-10-01); New Brunswick $15.90 (2026-04-01); Quebec $16.60 (2026-05-01); Ontario $17.95 (2026-10-01); Manitoba $16.40 (2026-10-01); Saskatchewan $15.70 (2026-10-01); Alberta $15.00 (2018-10-01); British Columbia $18.25 (2026-06-01); Yukon $18.51 (2026-04-01); Northwest Territories $17.20 (2026-09-01); Nunavut $20.17 (2026-09-01); Federal $18.15 (2026-04-01). Scheduled increases: Prince Edward Island $17.60 on 2027-04-01. The federal rate applies to federally regulated private-sector employers (where a provincial or territorial rate is higher, the higher rate applies). Rates for young workers, students and specific occupations are not shown.

Category	Minimum wage
Newfoundland and Labrador	$16.35
Prince Edward Island	$17.30
Nova Scotia	$17.00
New Brunswick	$15.90
Quebec	$16.60
Ontario	$17.95
Manitoba	$16.40
Saskatchewan	$15.70
Alberta	$15.00
British Columbia	$18.25
Yukon	$18.51
Northwest Territories	$17.20
Nunavut	$20.17
Federal	$18.15

A minimum wage fixed in dollars loses value as prices rise, so its bite changes even when the law does not.

Alberta general minimum wage, nominal and real

Hourly rate in effect on December 31; real values in 2025 dollars

• Nominal
• Real (2025 dollars)

Alberta's minimum wage in current dollars and in 2025 dollars. With the nominal rate frozen at $15, its real value fell from $18.37 in 2018 to $15.00 in 2025.Source: Government of Canada, Minimum Wage Database, General Hourly Minimum Wage Rates in Canada since 1965; Statistics Canada, Table 18-10-0005-01, Consumer Price Index, annual average. Retrieved 2026-10-23.

Show the data and notes

Nominal: general adult hourly rate in force on December 31 of each year (1965 is omitted because Alberta then had separate urban and non-urban rates). Real: nominal × CPI(2025) ÷ CPI(year), using Alberta's all-items CPI, annual average (Table 18-10-0005-01, https://doi.org/10.25318/1810000501-eng), which starts in 1979; year-end wages are deflated by annual-average prices.

Period	Nominal	Real (2025 dollars)
1966	$1.00	—
1967	$1.15	—
1968	$1.25	—
1969	$1.25	—
1970	$1.55	—
1971	$1.55	—
1972	$1.55	—
1973	$1.90	—
1974	$2.00	—
1975	$2.50	—
1976	$2.75	—
1977	$3.00	—
1978	$3.00	—
1979	$3.00	$12.92
1980	$3.50	$13.67
1981	$3.80	$13.14
1982	$3.80	$11.81
1983	$3.80	$11.22
1984	$3.80	$10.94
1985	$3.80	$10.62
1986	$3.80	$10.27
1987	$3.80	$9.87
1988	$4.50	$11.38
1989	$4.50	$10.93
1990	$4.50	$10.33
1991	$4.50	$9.76
1992	$5.00	$10.68
1993	$5.00	$10.58
1994	$5.00	$10.42
1995	$5.00	$10.19
1996	$5.00	$9.97
1997	$5.00	$9.77
1998	$5.40	$10.42
1999	$5.90	$11.12
2000	$5.90	$10.75
2001	$5.90	$10.51
2002	$5.90	$10.16
2003	$5.90	$9.73
2004	$5.90	$9.59
2005	$7.00	$11.15
2006	$7.00	$10.73
2007	$8.00	$11.68
2008	$8.40	$11.90
2009	$8.80	$12.47
2010	$8.80	$12.35
2011	$9.40	$12.88
2012	$9.75	$13.21
2013	$9.95	$13.29
2014	$10.20	$13.29
2015	$11.20	$14.43
2016	$12.20	$15.54
2017	$13.60	$17.06
2018	$15.00	$18.37
2019	$15.00	$18.05
2020	$15.00	$17.85
2021	$15.00	$17.30
2022	$15.00	$16.26
2023	$15.00	$15.74
2024	$15.00	$15.29
2025	$15.00	$15.00

Alberta also has a lower rate for students under 18: $13 an hour for the first 28 hours a week while school is in session, and for all regular hours during school breaks, in place since June 26, 2019.¹⁰ A lower floor for teenagers lowers the bite for the group the competitive model predicts will lose the most jobs.

U.S. federal minimum wage, nominal and real

Hourly rate in effect in December; real values in 2025 dollars

• Nominal
• Real (2025 dollars)

The US federal minimum has been $7.25 since 2009. In 2025 dollars its value fell from $10.88 in 2009 to $7.25 in 2025, about half its 1968 peak of $14.81.Source: FRED, Federal Minimum Hourly Wage for Nonfarm Workers for the United States (FEDMINNFRWG), U.S. Department of Labor; deflated with FRED CPIAUCNS (CPI-U, all items, U.S. city average, not seasonally adjusted), U.S. BLS. Retrieved 2026-10-23.

Show the data and notes

Nominal: federal rate in force in December of each year (first set in October 1938) for workers covered by the original Fair Labor Standards Act; until 1978, groups brought in by the 1961 and 1966 amendments (and farm workers) had lower minimums. Real: nominal × CPI(2025) ÷ CPI(year), using annual-average CPI-U (CPIAUCNS, https://fred.stlouisfed.org/series/CPIAUCNS; the seasonally adjusted CPIAUCSL only starts in 1947). CPI averages with missing months: 2025 (11 months) — BLS did not collect October 2025 prices during the federal government shutdown and averages the remaining months, as here. Many states and cities set higher minimum wages.

Period	Nominal	Real (2025 dollars)
1938	$0.25	$5.71
1939	$0.30	$6.94
1940	$0.30	$6.89
1941	$0.30	$6.56
1942	$0.30	$5.91
1943	$0.30	$5.58
1944	$0.30	$5.49
1945	$0.40	$7.16
1946	$0.40	$6.60
1947	$0.40	$5.77
1948	$0.40	$5.36
1949	$0.40	$5.41
1950	$0.75	$10.03
1951	$0.75	$9.30
1952	$0.75	$9.09
1953	$0.75	$9.02
1954	$0.75	$8.99
1955	$0.75	$9.02
1956	$1.00	$11.84
1957	$1.00	$11.46
1958	$1.00	$11.16
1959	$1.00	$11.04
1960	$1.00	$10.89
1961	$1.15	$12.39
1962	$1.15	$12.24
1963	$1.25	$13.14
1964	$1.25	$12.97
1965	$1.25	$12.77
1966	$1.25	$12.40
1967	$1.40	$13.51
1968	$1.60	$14.81
1969	$1.60	$14.04
1970	$1.60	$13.27
1971	$1.60	$12.72
1972	$1.60	$12.32
1973	$1.60	$11.60
1974	$2.00	$13.06
1975	$2.10	$12.56
1976	$2.30	$13.01
1977	$2.30	$12.22
1978	$2.65	$13.08
1979	$2.90	$12.86
1980	$3.10	$12.11
1981	$3.35	$11.86
1982	$3.35	$11.18
1983	$3.35	$10.83
1984	$3.35	$10.38
1985	$3.35	$10.03
1986	$3.35	$9.84
1987	$3.35	$9.49
1988	$3.35	$9.12
1989	$3.35	$8.70
1990	$3.80	$9.36
1991	$4.25	$10.05
1992	$4.25	$9.75
1993	$4.25	$9.47
1994	$4.25	$9.23
1995	$4.25	$8.98
1996	$4.75	$9.75
1997	$5.15	$10.33
1998	$5.15	$10.17
1999	$5.15	$9.95
2000	$5.15	$9.63
2001	$5.15	$9.36
2002	$5.15	$9.22
2003	$5.15	$9.01
2004	$5.15	$8.78
2005	$5.15	$8.49
2006	$5.15	$8.22
2007	$5.85	$9.08
2008	$6.55	$9.79
2009	$7.25	$10.88
2010	$7.25	$10.70
2011	$7.25	$10.38
2012	$7.25	$10.17
2013	$7.25	$10.02
2014	$7.25	$9.86
2015	$7.25	$9.85
2016	$7.25	$9.73
2017	$7.25	$9.52
2018	$7.25	$9.30
2019	$7.25	$9.13
2020	$7.25	$9.02
2021	$7.25	$8.61
2022	$7.25	$7.98
2023	$7.25	$7.66
2024	$7.25	$7.44
2025	$7.25	$7.25

Common mistakes

Traps on exams

• Counting only job losers. Unemployment also includes new entrants drawn into the labour force by the higher wage.
• Applying the model to a non-binding floor. A minimum wage at or below $w^*$ changes nothing.
• Saying every low-wage worker loses. Workers who keep their jobs gain; the model predicts winners and losers.
• Forgetting the uncovered sector. Whether displaced workers take uncovered jobs or queue for covered ones decides what happens to the uncovered wage and to measured unemployment.
• Treating a small employment effect as proof that demand curves do not slope down. Inelastic demand predicts small job losses, and monopsony can predict job gains.

On the exam

Draw the floor above $w^*$, read $E_D$ off the demand curve and $E_S$ off the supply curve, bracket the gap as unemployment, and split it into job losers ($E^* - E_D$) and new entrants ($E_S - E^*$). Shade the deadweight-loss triangle between the curves from $E_D$ to $E^*$.

Check yourself

1.

Which statement best describes the unemployment created by a binding minimum wage in a competitive labour market?

1It consists of workers who lose their jobs plus people who enter the labour force at the higher wage but cannot find work2It consists only of workers who lose their jobs3It consists only of new entrants, since firms keep all existing workers4It consists of workers who quit because their hours are cut

Check answer

2.

Which change makes the unemployment caused by a given binding minimum wage larger in a competitive labour market?

1More elastic labour supply and labour demand2Less elastic labour demand3A perfectly inelastic labour supply curve4A lower minimum wage that still binds

Check answer

3.

The covered sector pays a minimum wage of $16 and the uncovered sector pays $12. Workers move freely between waiting for a covered job and working in the uncovered sector. In equilibrium, what is the probability of getting a covered job, in percent?

Your answer (percent)

Check answer

Practise more questions on this topic

Sources

1. U.S. Bureau of Labor Statistics, Characteristics of minimum wage workers: 2010, table 1. ↩

2. Brown, C., C. Gilroy and A. Kohen (1982). The effect of the minimum wage on employment and unemployment. Journal of Economic Literature, 20(2), 487 to 528. NBER working paper 846. ↩

3. Baker, M., D. Benjamin and S. Stanger (1999). The highs and lows of the minimum wage effect: A time-series cross-section study of the Canadian law. Journal of Labor Economics, 17(2), 318 to 350. doi:10.1086/209923. ↩

4. Card, D. and A. B. Krueger (1994). Minimum wages and employment: A case study of the fast-food industry in New Jersey and Pennsylvania. American Economic Review, 84(4), 772 to 793. NBER working paper 4509. ↩

5. Neumark, D. and W. Wascher (2000). Minimum wages and employment: A case study of the fast-food industry in New Jersey and Pennsylvania: Comment. American Economic Review, 90(5), 1362 to 1396. doi:10.1257/aer.90.5.1362. ↩

6. Card, D. and A. B. Krueger (2000). Minimum wages and employment: A case study of the fast-food industry in New Jersey and Pennsylvania: Reply. American Economic Review, 90(5), 1397 to 1420. doi:10.1257/aer.90.5.1397. ↩

7. Cengiz, D., A. Dube, A. Lindner and B. Zipperer (2019). The effect of minimum wages on low-wage jobs. Quarterly Journal of Economics, 134(3), 1405 to 1454. doi:10.1093/qje/qjz014. ↩

8. Poulin, J. Minimum wage in Canada. The Canadian Encyclopedia, Historica Canada. thecanadianencyclopedia.ca. ↩

9. Government of Canada, Minimum Wage Database, Current and forthcoming general minimum wage rates in Canada. ↩

10. Government of Alberta, Minimum wage. ↩