Question

3) Beginning from a demand-supply model in equilibrium. A Graphically illustrate the classical minimum wage. Note the deadweight (welfare loss) loss and the loss or redistribution from job search. B. Discuss the effectiveness of the minimum wage (and desirability) from the classical versus Keynesian perspectives. C. Briefly discuss the heterodox theories discussed in your class notes/videos

Answer 1

Answer A :-

Labaun Rieddhs Unemplymart Wm Dead weght (makl Labosy Demaid Ls Ld Quarkity of labaur

In the above figure , we can see that the initial market equilibrium was set at W with L quantity .

When the minimum wages were set at Wm , the equilibrium gets disturbed , the supply of labour increase while the the demand of labour decreases . This creates an unemployment gap .

The decrease in demand of labour due to inability of producers to pay higher wages leads to dead weight loss marked by shaded area .

$2 Wer (mrt) La bau Darrard Demand in Irdus Denand Ih Indury D4 3-

The above graph represents the quantity of labour utilised in two industries along with the minimum wages set for the industries .

Now the quantity of labour is fixed , this means mobility of labour to one industry will decrease the supply of labour in another industry.

In the above graph the supply of labour in industry 1 is increasing causing decline of supply of labour in industry 2 .

The mobility of labour can be influenced by inducement of higher wages .

When more and more supply of labour is injected in industry one ,it's minimum wages decline from W to Wm .

Answer B :-

Classical approach :-

The standard neo classical theory predicts that the firm will respond to the rise in minimum wage in two ways :-

1) It will cut employment.

2) It will substitute higher skilled labour for lower skilled workers whose wages have risen .

Keynesian approach :-

According to Keynesian approach , the prices are sticky and those sticky prices causes unemployment for labour because the prices cannot be increased to cover the cost of increases minimum wages.

Answer C :-

The heterodox theories suggest that the minimum wages is integral part of the supply and retentivity of labour .

The wages should be set at that rate where pay in the industry confirms to the marginal productivity of labour employed in connection to the fixed amount of capital employed .

This method will help to set a minimum wage that would correspond to both producers and labour demands .