Question

In: Economics

A study reported that, all else the same, a 10% increase in the hourly minimum wage reduced annual hours of employment of young workers by 5%.

Agree or disagree and explain.

A study reported that, all else the same, a 10% increase in the hourly minimum wage reduced annual hours of employment of young workers by 5%.

a. Assuming this information is correct: is the wage-elasticity of demand for the labor for young workers about -2 or about -0.5 (that is, 2 or 0.5 in absolute value)? Briefly explain.

b.  Assuming the elasticity estimate from part “a” is correct, would increasing the minimum wage increase the annual earnings of youth? Explain.

Solutions

Expert Solution

(a) wage-elasticity of demand = % change in hours worked / % change in wage

= -5/10 = -0.5

Thus, the wage-elasticity of demand is -0,5 which means that the wage-elasticity of demand is inelastic

(b) earnings = wage*number of hours worked

=> % change in earnings = % change in wage + % change in hours worked

Since the wage-elasticity of demand is <1, the positive  % change in wage is greater than the negative % change in hours worked and thus, the % change in earnings is positive. Thuss the earnings will increase.

Rahul Sunny answered 2 years ago
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