Question

Recently, the Federal Minimum Wage is set at $7.25 per hour.

1. Suppose the market for unskilled labor is currently in equilibrium and that the equilibrium wage in this market is $7.25/hr. Draw a supply and demand diagram showing this market for unskilled labor. Label the price axis (“Wage/Hour”), the quantity of unskilled labor axis (“Quantity”), the demand curve (“D0”), the supply curve (“S0”), the equilibrium wage ($7.25/ hr), and the equilibrium quantity (“Q0”).

2. On the same diagram, show the effects of a new minimum wage set at $15/hr. Label the quantity demanded and the quantity supplied at $15/hr. Explain the effects of the new, higher minimum wage on the unskilled labor market: Does this create a surplus, shortage, or neither? Who, if anyone, does this new minimum wage help? Who, if anyone, does it hurt?

3 Suppose that due to an economic downturn, many businesses reduce their need for unskilled labor. Does this affect the supply of unskilled labor or the demand for unskilled labor? Show the effects of this shift on your diagram. Label this new curve. What has happened to the size of the surplus/shortage discussed in part C?

Please explain in detail.

Answer 1

1) The required graph is below: Wage/hour SO 7.25 DO Q0 Quantity 2) The required graph is below: Wage/hour SO 15 7.25 DO OD 0 QS Quantity At this new wage,QS>QD, leading to a surplus of labor and thus a situationof unemployment. This will hurt the unskilled workers, as their employment rates would fall.

3) A reduction in the demand for unskilled labor will shift the demand curve to the left. Keeping supply unchanged, this leads to a fall in unemployment and free market wage (down from S7.25) Wage/hour SO 15 f. 7.25 Di DO Quantity Surplus increases more because QD falls to QD', thereby increasing the gap representing surplus