Question

Here is the question: 7 The accompanying graph shows the economy of Sanderston With no minimum wage law, identify the equilibrium wage and the equilibrium quantity of labor. Now, assume that a binding minimum wage law at $15.00 is enforced. Does this result in a shortage or surplus of labor? Calculate the amount. Does the situation described in the graph show an increase in unemployment or a decrease is the minimum wage law good or bad for the economy of Sanderston?

Answer 1

The equilibrium level of wage and quantity is where the labour supply and the demand equals. The equilibrium wage rate is $ $10$ and the quantity is $10,000$.

When the minimum wage is set above the equilibrium price that is $ $15$ the quantity demanded of labour short fall of the quantity supplied of labour. So this is surplus of the labor because when the wage is above the equilibrium price more people will be ready for the work. The surplus is about $4000(12,000-8000)$.

We can clearly see that at the equilibrium prices 10000 labors are demanded and when there is minimum wage law the labor demanded reduced to 8000 so the minimum wage law increases the unemployment.

There is still a debate going on about whether the minimum wage is good or bad for the economy. The topic is most controversial among economists. There are both gainers and losers for the minimum wage , the argument against the minimum wage is that the minimum wages makes hiring workers expensive so the firm will not hire a up to a limit and this decreases the production.

The argument for the minimum wage is that, the more money spend on the wages will be spent on the goods and services and this creates more money.