Question

Hello, I am very confused with the below noted question.  

Mayor Emanuel expresses his desire to raise the minimum wage for adults 18 and over from $8.25 to $13.00 per hour. To simplify the analysis, let’s assume that prior to this change in the law, the current labor market for unskilled workers was in equilibrium at $8.25 per hour.

Question 1

1. Draw a graph depicting the current labor market for unskilled labor, with the quantity of unskilled labor (L) on the horizontal axis and the price of unskilled labor, wages (W), on the vertical axis. Show the demand and supply curves and discuss all equilibrium values.
2. Now analyze the impact of the new minimum wage law assuming it is put in place. Graphically indicate the outcome
3. Discuss the impact of the new law on employment and wages, and how your graph shows this.
4. As a result of the new law, suppose a newspaper editorial page applauded the change, saying that such help to the lowest earners could not have come at a more opportune time given the sagging economy. Do you agree? Explain.
5. Now suppose that after the $13.00 minimum wage is enacted, AND we observe no change in equilibrium quantity of L, but we do learn that some workers who want to work at $13.00/hour cannot find a job. Can you show a demand and supply curve analysis that supports this observation? Draw a graph showing this

Answer 1

Hi

Please see the attached graph. W0- 8.25 and W1= 13
The new law will definitely raise the wages, but at the same time, create Unemployment, as the labor demand shrinks, while the labor supply increases.

I do not agree with the newspaper's view here. The reduction in employment would lead to a decrease in Output, which may not help the sagging economy.   

For the last part, take the labor demand curve to be vertical, i.e. the number of people employed do not change with wage rate. In this case, there would still be Unemployment, as despite no reduction in labor demand, the labor supply however has increased, and consequently, some labor will not be able to find work. The only change required for this graph is that Labor Demand curve should be vertical.

Let me know in case of any queries.