Answer to Question #147087 in Macroeconomics for humna

Question

Before June 2020, the labor market in Pakistan was at equilibrium with an equilibrium wage (W
E) of Rs. 15,000 and equilibrium quantity of labor (LE) 10 million. In the last week of June, 2020, government of Pakistan imposed a minimum wage Act raising the minimum wage to Rs. 20,000. Using a graph, explain the effect of imposition of minimum wage on unemployment in labor market of Pakistan

Answer 1

The government could use fiscal policies to influence the unemployment rate. If the unemployment rate is too high, the government can reduce taxes and increase government spending. This would lead to higher aggregate demand and more production which would lead to lower unemployment. This could also lead to a higher inflation rate but as long as the inflation is within a certain range, unemployment could be focused upon. The government could impose a binding minimum wage which would lead to a surplus of labor because it would be higher than the market wage and hence more workers would want to work.