Question

Short answer question: 17) There is considerable interest in whether the minimum wage rate contributes to teenage unemployment. a. Draw a demand and supply diagram for the unskilled labor market, and show the minimum wage on the graph (label all the components of the graph). b. Discuss the effects of a minimum wage on quantity demanded and quantity supplied of unskilled labor. c. Does minimum wage cause a shortage or surplus in this market? d W is aler gions s on workn,o employers).

Answer 1

Hence, labor market equilibrium occurs at a real wage at which the quantity of labor demanded equals the quantity of labor supplied. This occurs at E where equilibrium wage is W* and employment is L*. Equilibriumm wage rate essentially brings the labour demand and supply in equilibrium. a) A minimum wage law is similar to a price floor that becomes binding only when the market clearing wage is lower than the upper bound and it is usuallv higher for unskilled labor Wage rate SL Shortage of jobs Surplus of labor WMIN b) It creates unemployment or job shortage in the market for labor. The minimum wage WMIN is higher than the market clearing one W*. Labor supply is L2 while labor demand is L1. Hence there is a surplus of labor L2 - L1. W* DL c) It creates unemployment or job shortage in the market for labor. There is a surplus labor or a shortage of iobs L1 L* L2 Quantity of labor d) A higher minimum wage might be sufficient to oust the unskilled workers from the market. They may not find jobs for longer span of time and so to survive may enter the underground or parallel economy. Their entry will inflate the underground economy as they may turn petty criminals, illegal drug suppliers etc. Employers are forced to hire only a skilled labor because the wage rate is higher so they may be tempted to higher equally productive labor. These skilled workers will now be more demanded and so skilled workers are benefitted, unskilled workers who got the job are also benefitted as their wage is increased and displaced workers are at a loss