Answer to Question #312063 in Microeconomics for Kashi

Question

8. A case study in this chapter discusses the fed- eral 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 unem- ployed. Also show the total wage pay- ments to unskilled workers.

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

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

Answer 1

Increase in the minimum wage gap leads to an increase to a decrease in employment by the company because increase in the wages of the employees will make the amount being used by the company to pay employees to increase. As a result, there must be a counteract process that must be used to cater for the increase in the wages if the number of employees should not be reduced. The employment rate will therefore, be affected by both the elasticities of demand and supply. Increase in elasticity of demand means that the prices have reduced, this is good for the organization since it will enable increase in goods and services purchased, which results in increase in profits that will be used to pay the employees their minimum wage. Increase in elasticity of supply imply that the prices of commodities have increased, which have resulted in lower demand, which also affects the minimum wage of the employees. Unless there is shortage of the goods that even increasing the price of the commodities will increase the demand, without this condition increasing the wages of employees is impossible under normal market conditions.