Answer to Question #223249 in Macroeconomics for Komal

Question

Before June 2021, the labor market in Sindh was at equilibrium with an equilibrium wage (WE) of Rs. 17,000 and equilibrium quantity of labor (LE) 20 million. In the last week of June, 2021, government of Sindh imposed a minimum wage Act raising the minimum wage to Rs. 25,000. Using a graph, explain how the minimum wage law imposed by the Sindh government affects the unemployment rate in Karachi. (2 Marks, Maximum 100 words

Answer 1

The introduction of a minimum wage will impact all parts of Sindh, including Karachi. On the graph below, the labor market in Karachi is at equilibrium at point A where the equilibrium wage is W* while the equilibrium quantity of labor is Q*. However, when a minimum wage of W1 is imposed, the quantity of labor supplied (Qs) exceeds the quantity of labor demanded (Qd). The introduction of minimum wage increases the number of people willing to work while reduces the number of employees that firms are ready to hire and thus cause an increase in the unemployment rate. On the graph below, the hike in unemployment is shown by the difference between Qs and Qd.