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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

A case study in this chapter discusses the federal minimum-wage law.

a. Suppose the minimum wage is above the equilibrium wage in the market for unskilled labor. Using a supply-and-demand diagram of the market for unskilled labor, show the market wage, the number of workers who are employed, and the number of workers who are unemployed. Also show the total wage payments to unskilled workers.

b. Now suppose the secretary of labor proposes an increase in the minimum wage. What effect would this increase have on employment? Does the change in employment depend on the elasticity of demand, the elasticity of supply, both elasticities, or neither?

c. What effect would this increase in the minimum wage have on unemployment? Does the change in unemployment depend on the elasticity of demand, the elasticity of supply, both elasticities, or neither?

d. If the demand for unskilled labor were inelastic, would the proposed increase in the minimum wage raise or lower total wage payments to unskilled workers? Would your answer change if the demand for unskilled labor were elastic?

Sub part (a):

To determine

The impact of minimum wage higher than the equilibrium wage rate.

Explanation

When there is a minimum wage set above the market equilibrium wage rate by the government, the wage rate will increase and the employers will have to pay higher than the equilibrium wage rate for employing the unskilled labors. As a result, the demand for the unskilled labors will fall. At the same time, the higher minimum wages will attract more labors into the market which will increase the supply of labor in the market. As a result of these, there will be surplus labor in the market and the rate of unemployment will increase in the economy. This can be explained with the graph as follows:

Sub part (b):

To determine

The impact of minimum wage higher than the equilibrium wage rate.

Sub part (c):

To determine

The impact of minimum wage higher than the equilibrium wage rate.

Sub part (d):

To determine

The impact of minimum wage higher than the equilibrium wage rate.

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