Question

Statutory Minimum Wage (SMW) has come into force since 1 May 2011 in Hong Kong. The current SMW rate is $37.5 per hour. a. Briefly explain how an effective minimum wage causes a structural unemployment. b. With the aid of a demand-and-supply diagram, illustrate the effect of an economic recession on a labour market with an effective minimum wage.

Answer 1

a. Structural Unemployment is the unemployment that exists because wages do not adjust to equilibrium which causes the number of job- seekers to exceed the number of available jobs even in economic boom.

The government creates a price floor. Price floor is the wage below which no employer is allowed to hire workers. It mainly affects the employment of least- skilled workers and not the skilled workers as equilibrium of skilled workers is above the minimum wage.

The labor demand curve is negativey sloping. It means that as the wages fall, firms are willing to hire more workers. It is due to diminishing marginal product of labor. As we add more and more workers while keeping capital constant, they are increasing less and less productive. The labor supply curve is upward sloping. It means that more workers are willing to work at higher wages.

b.

In the diagram, due to the minimum wage policy, market wage does fall to a point E and it leads to continuous surplus of workers. It is because firms only hire workers with its labor demand curve and the minimum wage W(M), Point D are the number of available jobs and Point F is the number of workers wiling. The difference between Q(F) and Q(D) equal the shortages of jobs that results from higher than equilibrium wages.