Question

Question 2. Short answers. Use graphs where appropriate.

1. Explain why is the short run labor demand curve less elastic relative to the long run labor demand curve. (7.5 points)

2. How would imposing a minimum wage above the market-clearing wage affect employment in a competitive labor market? Use a graph to illustrate this. (7.5 points)

3. Many immigrants and many American high school dropouts possess very few skills. What impact will these low-skill immigrants likely have on the labor market opportunities of American high school dropouts? (7.5 points)

4. Comment on this statement: “If we deported all undocumented persons who are now in the United States, our total national unemployment would decline by the same number of people.” (7.5 points)

Answer 1

1.

Short run labor demand is less elastic, because firms cannot adjust quickly in the short run and they have to maintain the same demand of workers even if the wage increases or minimum wage is applied. But, in the long run, firms can deploy more capital, adjust to the market condition and demand less of the workers. So, labor demand becomes more elastic in the long run.

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2.

When minimum wage is higher than the market clearing wage, then it increases the cost of operations for the firms. In response to it, firms demand less workers. So, unemployment increases. Here, the most affected workers are the nonskilled workers in the organization. It is shown as follows:

After minimum wage at W1, the labor quantity demanded is Q1 that is less than quantity Q of Market clearing wage. So, unemployment increases.

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3.

When low skill immigrants come to the labor market , then they will take up opportunities what that is available for the high school dropouts. It will also happen, because these low skill immigrants will be ready to work at lower wage rates. Hence, unemployment among high school dropouts increases.

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4.

When these individuals are sent back to their nations, then it will create more employment opportunities in the short run. But, it will be less than the number of people sent out to the their nations. But, it will also decrease the AD in the market and SRAS will also decrease, laying off some workers. So, it will increase the unemployment rate again in the market. Hence, the decrease in unemployment is not permanent as people moving out to their nations, also move away some demand with them.