Question

2. In an industry, labour supply is E 10 + w and labour demand is E the level of employment and w is the hourly wage 60-4w, where E is a) What are the equilibrium wage and employment if the labour market is competitive? b) Suppose the government sets a minimum hourly wage of $12. How many workers would lose their jobs? How many additional workers would want a job at the minimum wage? What is the unemployment rate? c) Draw a graph to illustrate and calculate the deadweight loss caused by the minimum wage d) Suppose there is no minimum wage. What are the equilibrium wage and employment in a nondiscriminating monopsony labour market? e) Suppose the government sets a minimum hourly wage of $8. What is the equilibrium employment in a nondiscriminating monopsony labour market? )Card and Krueger (1994) study minimum wage in New Jersey. What are the treatment and control groups in the paper? Is their finding more consistent with the market structure in (a) or the market structure in (d)? Explain

Answer 1

Q.2.

Labor supply is given as:

Labor demand is given as:

a)

If the labor market is competitive, equilibrium is defined where labor supply is equal to labor demand. Hence equilibrium wage is obtained as:

L L 10w 60- 4w 5w 50w =10

Plugging back equilibrium wage into either labor supply or labor demand equation, we get equilibrium labor in competitive market as:

b)

Let us suppose that government imposes a minimum hourly wage of $12. This imposes a price floor leading to unemployment in the economy. Following graph helps us understanding these effects in a better way.

Impact of Minimum Wage on Labor Quantities Supplied and Demanded Unemployment: Surplus of Labor Supply (people wanting to work) Price Minimum wage Market equilibrium price Demand (jobs available) #of jobs available #of jobs being sought Quantity

In our example, equilibrium wage in competitive market is $10/hour while minimum wage is given as $12/hr.

Labor supply at minimum wage rate:

Similarly, Labor demand at minimum wage rate:

Hence labor supply (no. of jobs being sought) = 22 which is greater than the no. of jobs available = 12 (labor demand) leading to unemployment in economy due to surplus of labor.

Initially 20 workers were hired when there was no minimum wage law (See part (a)) but now only 12 workers are hired.

So, no. of workers losing jobs = 20 - 12 = 8

At minimum wage rate, 22 workers want the job. Hence additional workers seeking a job at this rate is 22 - 20 (competitive equilibrium labor supply) = 2

Unemployment rate is defined as the number of unemployed people as a fraction of total labor force.

Labor force in our case is total labor supply in economy at minimum wage rate = 22

No. of unemployed people = no .of jobs being sought - no. of jobs available = 22 - 12 = 10

These data consists of no. of people who have lost their jobs (8) and no. of workers seeking a job at this rate (2).

c)

Deadweight loss is the loss incurred in economy due to policy interference (imposing minimum wage rate in this case) which hamper the full potential level achievable in a market economy.

Understanding the dynamics from previous diagram, the new graph is shown below (With numerical values). The area of shaded triangle is the deadweight loss.

Muiinum unge L'60- 1

Hence area of shaded triangle = (1/2)* base * height = (1/2)* (12-2)*(20-12) = (1/2)* 10*8 = 40 units