A relevant question arises here. Is it possible for the government to increase the wage rate without adversely affecting the employment of labour?

Sometimes governments fix a legal minimum wage for industries.

It must be remembered here that this is not always a wise policy in view of the legal minimum wage having an adverse effect on the level of employment in a perfectly competitive labour market. This fact is clearer in Fig. 16.

Effect of a Legal Minimum Wage

In the freely-functioning perfectly competitive market, the equilibrium wage rate shall be determined by the point where the VMP of the labour equals the marginal and average cost of employing the labour. The VMP curve intersects the WW’ line to determine ON1 level of employment for labour with the wage rate level OW. Now let us suppose that government fixes the wage rate at OW1. As a result, the supply curve of labour becomes the horizontal line from W1. This cuts the VMP curve to determine the employment level at ON2. Thus, there is a diminution of employment with the fixation of the legally minimum wage rate.


It is possible for the government to raise wages without affecting employment adversely in a labour market characterized by monopsony. Such a market is shown in Fig. 17 given. The monopsonist employer would fix the wage rate at OW because that equates his VMP with the MFC. Now, if the government fixes the wage rate at OW1, the supply curve of labour is the horizontal line W1Q. The employer will employ ON2 workers. There is an increase in wage as well as employment. The government can fix the wage rate of OW2 which the employer will be obliged to give, keeping employment at ON.

Fixation of Wages by Monopsonist Employer