In the labour market, the employers determine the demand and the employees determine the supply of labour. At normal circumstances, the higher the opportunity cost of leisure time and activities to work, higher the wages will be. On the other hand, the supply of labour market is highly competitive that every household is the supplier of labour (Wall, 1995). Free and pliable labour market is self-regulating; the price of wages alter automatically to bring the market to equilibrium (Abbott, 2013).
The Bertrand competition assumes that even in a market of two supplier, both assumes the other supplier will remain prices unchanged (Dufwenberg, Gneezy, Goeree, Nagel, 2007). In order to gain maximum benefits from the market, one has the incentive to cut price which leads to a price war. Minimum wage has been introduced as a floor price to deviate from the equilibrium to prevent competition and to increases the total income of a worker. Hence, increases household income and decrease welfare and assistance cost for the government (Root, 2014). Besides that, the introduction of this legislation can increase human capital accumulation; a low demand for unskilled labour, induced by a minimum wage, may encourage workers to accumulate human capital (Cahuc, Michel, 1996).
However, surveys have been taken and shown that the majority agreed minimum wage creates unemployment within young, unexperienced or unskilled labour (Summer, 1991). High unemployment rate among teenagers, might have keep teenagers in school and not to join the work force in an early age, but this will not help increase in the total of household income for families with dependents. When the minimum wage is set by law above the equilibrium of the market, the quantity of labour supplied exceed the quantity labour demanded. The difference of the supply and demand, will lead to a surplus of labour in the market,