Question

Intermediate microeconomic (400 words) need more explanation

How do minimum wages affect employment, and unemployment? In a competitive labor market, the demand for workers is given as QD=10,000-100W, and the supply of workers is given as QS=2,000+1,900W, where Q is the quantity
of workers employed and W is the hourly wage. What is the initial equilibrium wage and employment level? Suppose that the government decides that $5 per hour is the minimum allowable wage in any market. How would this new minimum wage alter this market? What would the new employment level be? What would happen to total payments to labor? Would there be any excess supply of labor?

Answer 1

Minimum wage law have been passed by various government to ensure basic wage to all labor such that labor class in not exploited and can sustain basic standard of living. Labor class works in a very humiliating environment where there is less safety, these laws are passed such that we can give them a incentive to work. Minimum wages are more effective if it is imposed above the existing equilibrium wage where supply of labor gets more than demand of labor.

Demand of worker: 10,000 - 100W

Supply of worker: 2,000 + 1,900Q

At equilibrium, demand of labor = supply of labor

10,000 - 100W = 2,000 + 1,900W

8,000 = 2,000W

W = 4

At this wage, labor hired = 10,000 - 100 * 4 = 9,600

If the minimum wage is imposed at a wage rate of $5

Demand of labor at this wage rate = 10,000 - 100 * 5 = 9,500

Supply of labor at this wage rate = 2,000 - 1,900 * 5 = 11,500

At this wage rate, there become surplus of labor equal to 11,500 - 9,500 = 2,000 due to supply of labor > demand of labor. New employment level be 9,500 because producers only demand this much of labor. Total payment made to labor 9,500 * 5 = 47,500 while earlier it was 9,600 * 4 = 38,400.