Question

Show that there is not unemployment in the competitive labor market (You must use graphs) ? And show the implication of the minimum wage law in terms of the unemployment in the competitive labor markets? (You must use graphs)

Answer 1

Ans. In a competitive labour market the equilibrium quantity of labour and equilibrium wages are determined ny the interaction of the labour demand and labour supply curve. So, equilibrium quantity of labour employed is Q and wage is w and there was no unemployment in the market.

But when a minimum wage law is introduced and the wages are set above the equilibrium wage, w, to w'. This increases the quantity of labour supplied to Qs in the market because now people who were unwilling to work at low wage, w, find it attractive to join the labor force due to higher wage rate, w'. But the quantity of labour demanded falls to Qd as firms won't be willing to employ the same number of employees at increased wages because that will increase their costs and decrease their profits. So, there is surplus of the labour in the market equal to the Qs - Qd and this surplus of labour is unemployed. Thus, minimum wage law increases unemployment.

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