Question

Help Save & Exit Submit Assume that the government imposes a binding minimum wage. Holding labor supply constant, what would have to happen in order for all workers in the market to find a job at the minimum wage? Multiple Choice There would have to be a decrease in the demand for output There would have to be a huge federal budget deficit The demand for labor would have to increase sufficiently. The stock market would have to rise.

Answer 1

Option 3: The demand for labour has to increase sufficiently

In the labour demand supply model minimum wage is set above the equilibrium i.e. above the wage corresponding to the intersection of labour demand and supply curves. This is to ensure workers are getting a wage to maintain a threshold level of standard of living. Now, as a result of the minimum wage excess supply of labour is created, as above the equilibrium wage: labour demand falls and supply increases.Thus in order for all the workers in the market to find a job at the minimum wage there must be a compensating increase in demand. The exogenous increase in demand means demand curve must shift to the right to employ the excess workers.