Minimum Wage (Chain of Analysis)

A minimum wage is a legally protected pay floor in the labour market. An employer cannot pay below it.

One possible effect of a higher minimum wage is that a business such as a fast-food provider will experience a rise in their variable costs.

This is because hourly wage costs will increase leading to a rise in total variable costs.

Assuming that labour productivity remains constant, then average variable cost will rise and so too will marginal and average total cost.

As a result of an upward shift in costs, the profit margin that firms make will fall. This is shown in my analysis diagram.

The effect on profit then depends on whether a firm passes on higher costs to consumers which in turn depends on price elasticity of demand