Question

consider a labor market experiment involving four buyers (firms) and four sellers (workers).

Each firm seeks to hire a single worker and each worker can work for a single firm. Each firm has a maximum revenue they can earn per worker hired.

Each worker has a cost of working, which represents the value of his or her leisure time. Suppose the revenues from hiring a worker are $23, $15 and $21 and $17 for firms 1, 2, 3 and 4, respectively. Suppose the costs to working of the four workers are $12, $14, $16 and $10.

a. What would be the equilibrium wage range and employment level (number of workers hired)you would predict for this experiment? Illustrate your argument graphically.

b.Suppose you were interested in studying the effect of the introduction of a $20 minimum wage in your experimental labor market. What would you predict would be the equilibrium wage and employment level in this case?

c.How might your results rationalize the economics profession’s view that a minimum wage “creates both winners and losers”.

Answer 1

a).

Consider the following fig.

So, here blue curve be the demand curve for worker and the red curve be the supply curve, => the intersection of these two will be the equilibrium price, => here the range of equilibrium price is “16 to 17” and the equilibrium labor employment is “L*=3”.

b).

Now, if a minimum wage of “p=20” is imposed, => it will be a binding price floor, => here supply increase to “4” and the demand decreases to “2”, => there will be an excess supply or surplus of worker. So, the price will be “p=20” and the employment decreases to “L=2 < 3”.

c).

Here we can see that the firm’s surplus decreases (the area under the demand curve over the price level) and the workers surplus (the area under the supply curve under the price level) increases, => here the workers are the winner and the firms are the losers.