Question

Labour Markets: Consider a hypothetical market for low-skilled labour. For simplicity, assume the short-run supply of workers is given by the equation Qs = 100 + 10w, where Qs is the quantity supplied and w is the wage. The demand curve is given by Qd = 250 − 5w, whereQd is the quantity demanded.

1. Provide some intuition as to why the elasticities are inelastic.

2. Supposethegovernmentweretoimplementaminimumwage(apricefloor)thatincreased the wage by 50%. Using your calculated elasticities, determine the response of workers and firms. Confirm these results using the equations for Qs and Qd.

3. Given the original wage (part 1) and the new wage (part 4), use the midpoint method to calculate the price elasticities of supply and demand.

4. This results in a surplus of workers. How large is this surplus?

5. Consider the long-run supply of workers. Specifically, suppose individuals who have not yet entered the workforce see this surplus (unemployment). How might they respond? Specifically, what substitutes might they identify for working in this market and how might that affect the elasticity of the long-run labor supply curve?

6. Consider the long-run demand for workers. How might firms respond to the new wage (part 4) and how will this affect the price elasticity of demand. Suppose this response results in a new demand curve given by Q′d = 210 − 10w. Calculate the price elasticity of demand at the wage in part 4.

7. Suppose the minimum wage did not exist. Find the market equilibrium (price and quantity) given Qs and Q′d (the long-run demand for low-skilled workers. Calculate the price elasticities of supply and demand at this new equilibrium.

Answer 1