Question

Assume that the (daily) demand (measured in hours of work) of unskilled

labor in a particular town is given by D(w) = 60 -w, where w denotes the hourly

wage rate. The supply of unskilled labor at the same location is given by S(w) = 3w -12.

(a) What is the competitive market equilibrium wage for unskilled labor in this

town?

(b) Plot the demand and supply curves on the same graph, having wages on the

vertical axis and hours of work (that is, labor) on the horizontal axis.

(c) Explain what would be the effect (if any) of a $20 per hour minimum wage

in this market. What happens to the market demand and market supply of

labor? Identify who benefits and who loses from such measure and by how

much. What can you say about society as a whole: is it better or worse

off (and by how much)? Draw a new graph and mark everything clearly on it.

Answer 1

Equilibrium Wage is determined by the intersection of DL and SL.

So W = DL =SL

D(w) = 60-w =   S(w)= 3w-12

60-w = 3w-12

60+12 = 4w

72/4 = w

W = 18

Here the equilibrium wage is 18. Similarly D & S is equal to 42 at the equilibrium level.

When the wage rate increase to $20 per hour, the supply of labour is greater than demand. Market demand for labour is less but supply is more. So it creates unemployment in the labour market. The beneficiaries are the firm's or producers. The $2 increase in the minimum wage rate will give more benefits to the producers. It will worse of the society as a whole. The reason is that people are willing to do work but didn't get work. An increase in the supply of labour may leads to fall in the initial wage rate. Here one person's condition can made better off only at the expense of the other. There is a decrease in the social welfare.