Question

Minimum wage laws, labor unions, and the efficiency wage theory may explain the presence of above-equilibrium wages in a free market (Mankiw, 2018, pp. 390-391). Explain how each phenomenon leads to above-equilibrium wages. Note that the description provided on the textbook is rather short. You may need to conduct additional research by going back to some previous chapters or conducting research outside our textbook. Do you best to apply each of situations you may be familiar with or may have read. Your response must contain at least 200 words. Please state your word count and include your list of source(s).

Answer 1

Minimum wage laws :   According to this law a minimum wage floor is set and the wage is not allowed to fall below this minimum wage floor . The floor is a binding constraint . The minimum wage law is effective only when it is set above the equilibrium wage . If it is set below equilibrium then the market will go up to equilibrium . It creates surplus or unemployment . So it results in above equilibrium wages .

Labor unions : They are organization of workers who have come together to achieve common goals , such as protecting the integrity of its trade , improving safety standards , and attaining better wages , other benefits etc . They negotiate with employers for better wages so that the standard of living of workers improve . So this leads to an above equilibrium wage .

Efficiency Wage : Sometimes wages are deliberately set above market clearing wage . This is done to encourage workers and increase productivity . Due to efficiency wages there will be unemployment , so the workers will be in a fear of losing their jobs and getting replaced by someone from the pool of unemployed workers . This reduced shirking and increases productivity per worker . Hence efficiency wage is set above equilibrium wage .