Question

From time to time, the government has raised the minimum wage. Some people suggested that a government subsidy could help employers finance the higher wage. This example examines the economics of a minimum wage and wage subsidies. Suppose the supply of labor given by Ls=10W, where Ls is the quantity of labor (in millions of persons employed each) and w is the wage rate (in dollars per hour). The demand for labor is given by Ld= 80-10W.

a) What will be the free-market wage rate and employment level? Suppose that the government sets a minimum wage of 5$ per hour. How many people would then be employed?

b) Suppose that instead of a minimum wage, the government pays a subsidy of 1$ per hour for each employee. What will the total level of employment be now? What will the equilibrium wage rate received by workers and the one paid by employers after the subsidy be?

c) How does the outcome from imposing a minimum wage compare to the outcome of providing a subsidy in terms of the deadweight loss to the economy? Show the deadweight loss areas in a graph with L on the x-axis and w on the y-axis (Note: you can use one graph for each policy or draw both on the same graph as long as all areas are clearly labeled).