If the minimum wage is $10.00, employers will attract more workers than they are willing to hire. In the absence of price controls, this causes employers to lower the wage until the quantity of labor supplied is equal to the quantity they demand (this occurs at $8). That is, a surplus puts downward pressure on wages. If a minimum wage is set above the market equilibrium wage, however, the market cannot reach equilibrium; thus the minimum wage is considered binding.
If the minimum wage were instead set at $7.50 and employers initially paid that wage, a shortage of workers willing to supply labor would put upward pressure on wages. Because there is no ceiling on wages, the market would be able to reach equilibrium; therefore, a minimum wage of $7.50 is not binding.
A binding minimum wage will contribute to a persistent surplus of labor in this market, generating structural unemployment. Structural unemployment is unemployment that arises from a mismatch between the skills of the existing labor force and those required to perform available jobs. One source of structural unemployment is minimum wage legislation, which holds wages above the productivity levels of less skilled workers, who are thus ill-suited to existing jobs. In this scenario, the quantity of labor supplied will continue to exceed the quantity of labor demanded as long as the minimum wage remains above the market equilibrium wage. The resulting surplus of labor creates a pool of unemployed workers—people who would like to work at the prevailing minimum wage, but who cannot find a job.
