Would the employment effect of a minimum wage be larger or smaller if the labor demand...

Would the employment effect of a minimum wage be larger or smaller if the labor demand elasticity with respect to wages is elastic (E < −1)? Briefly explain.

Expert Solution

IF elastic demand then the effect of employment is Large change

If inelastic demand then the effect of employment is a small change

as the graph below shows that if demand is relatively elastic then an increase in the minimum wage leads to decrease in the quantity of unskilled labour because the elasticity of labour demand tells us how firms are sensitive for hiring decisions are to changes in the wage. Elastic demand for labour means that if firms will want a small change (increase) in the wage by laying off / firing a large number of workers, therefore the employment effect will be large. The elasticity of labour supply(SS) is not relevant, if we are concerned with employment effects only.

Rahul Sunny answered 9 months ago

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