Which of the following is a potential drawback of establishing a minimum wage rate?

• A. It may lead to higher unemployment among low-skilled workers.
• B. It always increases overall economic efficiency.
• C. It reduces the cost of production for firms.
• D. It guarantees that all workers will earn above the poverty line.

Answer: (A)

Verified step by step guidance

1. Understand the concept of a minimum wage: it is a legally mandated lowest hourly wage that employers can pay workers.
2. Recall the basic supply and demand model for labor, where the labor demand curve slopes downward and the labor supply curve slopes upward.
3. Analyze what happens when a minimum wage is set above the equilibrium wage: it creates a price floor in the labor market.
4. Recognize that a price floor above equilibrium can cause a surplus of labor, meaning more workers want jobs at that wage than there are jobs available, potentially leading to unemployment.
5. Evaluate the given options by comparing them to economic theory: the potential drawback is that a minimum wage may increase unemployment among low-skilled workers, while the other options are either incorrect or not guaranteed outcomes.