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ECON: MICRO4 (New, Engaging Titles...

4th Edition
William A. McEachern
Publisher: Cengage Learning
ISBN: 9781285423548

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ECON: MICRO4 (New, Engaging Titles...

4th Edition
William A. McEachern
Publisher: Cengage Learning
ISBN: 9781285423548
Chapter 4, Problem 7.15PA
Textbook Problem
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(Price Floor) There is considerable interest in whether the minimum wage rate contributes to teenage unemployment. Draw a demand and supply diagram for the unskilled labor market, and discuss the effects of a minimum wage. Who is helped and who is hurt by the minimum wage law?

To determine

The effect of minimum wage on the unskilled labor market.

Concepts Introduced Wage Floor - It is the minimum wage or wage bracket established by law. It is the floor below which the prices are not allowed to fall in an industry or sector.

Explanation of Solution

The market-driven wage equilibrium may or may not be conducive to the welfare of the workers. Left to itself, the wage rate may be exploitative for the workers who are unskilled and not in a position to bargain. In the illustration below, E is the market-driven equilibrium wage rate and the level of employment is the corresponding quantity of labor on the X-Axis.

For the employee welfare, the government may intervene in the labor market and establish a wage floor. This implies that as per law, the minimum wage that the labor employed must get for their work is determined and any employment of the workforce below this rate is illegal and punishable. The measure is certainly a restrictive policy to curb workers’ manipulation at the hand of the employers but comes with its cons. In the diagram above, it can be seen that the minimum wage creates a labor surplus, i...

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