Question

In light of a new bill to raise the minimum wage, an employer asks: "I have 3

employees. If I can pay each of my 3 employees $10 a piece for a grand total of $30

an hour, and the minimum wage suddenly gets raised to $15/hr, what happens to

employee number 3?" First, give an answer to this rhetorical question then second,

show this result using a supply and demand diagram.

Answer 1

Answer : Here grand total $30 per hour is the budget for the employer to spend the whole amount only on employees. Now if the wage rate become $15 per hour then the quantity demanded for employees decrease. In this situation the employer will hire (30 / 15 = 2) only 2 employees. So, if the wage rate increase from $10 to $15 per hour then the number of employees will decrease from 3 to 2 due to decrease in quantity demanded.

The above situation is shown by the following picture's diagram.

In the above picture's diagram when the wage rate was $10/hour then the employer hires 3 workers. When the wage rate increases to $15/hour then the quantity demanded is 2 workers and the quantity supplied is 4 workers. As the quantity demanded is 2 workers at $15/hour wage rate, hence the employer will hire only 2 workers. So, here it is clear that at $15/hour wage rate the number of employees decrease.