Learn it, live it, love it. The key graph, with my commentary:
In Figure 1 below, for diagrammatic simplicity, I assume that the initial market-clearing wage for low-skilled labor is $7.25 per hour. At this $7.25 wage rate, two million workers have jobs. Then, the federal government imposes a wage floor of $10.10 per hour. Because the demand for low-skilled labor is (by stipulation) very inelastic, the quantity of labor demanded falls by only 2,000 workers, a negligible drop of 0.1 percent. Economists running regressions on this episode would conclude—correctly—that raising wages by 39 percent had little impact on the absolute level of employment.
However, in our example, the supply curve (by construction) is a more typical shape, such that the large increase in the wage rate leads to a large increase in the number of workers seeking employment—500,000 in our scenario. There is now a significant amount of involuntary unemployment in the market for low-skilled labor; the unemployment rate would skyrocket.4
Even though (by construction) our hypothetical minimum wage has not significantly reduced total employment, it has, nonetheless, drastically impaired the functioning of the labor market. The “glut” of workers on the market means that non-price allocation mechanisms must come into play. Since there are now multiple applicants for a given job opening, employers can rely on other criteria, including racial and class background, to choose which worker gets the job. It is much more likely that an applicant will need to “know somebody” to get hired, and that teenagers from “respectable” backgrounds will be the ones to work at fast food restaurants, displacing teenagers who might be in more desperate circumstances.
I also summarize some of the key issues in the econometric debates, but without declaring an unambiguous victor. My aim was more modest (in this article): I wanted to let the lay person (and indeed other economists) understand how it was possible to be arguing about this, when we supposedly have such a rich data set of minimum wage changes and employment responses.