Consider a low-wage labor market. Workers in this market are not presently covered by the minimum wage, but the government is considering implementing such legislation. If implemented, this law would require employers in the market to pay workers a $5 hourly wage. Suppose all workers in the market are equally productive, the current market clearing wage rate is $4 per hour, and that at this market clearing wage there are 600 employed workers. Further suppose that under the minimum wage legislation, only 500 workers would be employed and 300 workers would be unemployed. Finally, assume that the market demand and supply curves are linear and that the market reservation wage, the lowest wage at which any worker in the market would be willing to work, is $2. Compute the dollar value of the impact of the policy on employers, workers, and society as a whole.

As a result of the increase in the wage they must pay; employers will lose surplus that relates to the area of a trapezoid resulting from the reduction in the size of the surplus triangle according to the demand curve of labor; In short, since the trapezoid is a parallelogram ; it could be thought to be as a rectangle with sides equal to the wage increase of ( $5 - $4) = $1

Also; the new employment level is $500

The triangle with a height equal to the wage increase is $1 with a base equal to the reduction in the number of workers demanded (600 - 500 = 100)

Summing up all two areas together;we get:

= (1)(500) + (1) (100/2)

= 500 + 50

= $550

The worker who remain in the market each gain a surplus equal to the amount of $1 increase in the wage that they receive.

Therefore; the total increase in surplus = (1)(500) = $500

The 100 workers who lose their job will definitely lose surplus.

If these worker are evenly distributed along the market supply curve between the market reservation wage of $2 and market equilibrium wage of $4.

Their average loss of surplus can be computed as:

= 1/2($4 - $2)

=0.5($2)

= $1

Thus; the total loss of surplus is :

= $100× $1

= $100

Thus , the total impact of minimum wage on employers, workers, and society as a whole is :

= $550 -$ 100 - $550

= -$150