Question

Imagine that you are the economic advisor of a country which experiences a high unemployment rate for a long time. The government (does not know the economic theory ) and is willing to implement the following policies in order to reduce the unemployment rate. The first one is to reduce the minimum wage. The second one is to increase the unemployment benefits. Discuss the two policies and their effect ( rely on the theory you have learnt ) and ultimately advice the government on what to do

Answer 1

At minimum wage, supply of labor is more than demand of labor which means that there exist unemployment in the economy. If minimum wage rate is reduced to new minimum wage, supply of labor at that wage is low than initial level and demand is high than initial level which reduces the unemployment rate.

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If unemployment benefits are raised, it will induce workers to not even look for a job because they are getting sufficient perks in the form of money and others from government. It will unnecessarily raise deficit of government.

So, i would suggest to reduce minimum wage to reduce unemployment rate in the economy.