Question

Analyze the impact of an increase in the minimum wage from the current level to $15 per hour. How would the following be affected? a. employment of people previously earning less than $15 per hour b. the unemployment rate of teenagers c. the availability of on-the-job training for low-skilled workers d. the demand for high-skilled workers who are good substitutes for low-skilled workers Review the mechanics of price floors and price ceilings. Why does a price floor lead to surpluses? Why does a price ceiling lead to shortages? Review consumer and producer surplus. A price floor will lead to a transfer of consumer surplus to producer surplus; a price ceiling will lead to a transfer of producer surplus to consumer surplus; both price regulations lead to deadweight losses, which is a loss of surplus to society. Why?

Answer 1

Government sometimes increases the minimum wage to protect the workers against exploitation.

a)On employment of people previously earning less than $15 per hour. - Total employed workers will decrease as employers will demand less quantity of labour. And some of the existing working labourers will also lose their jobs.

b) Unemployment rate of Teenagers- Unemployment among teenagers will rise.

Usually teenagers are unemployed or if they are employed they have no fixed job. Because of increasing minimum wage, the teenagers who are now employed will also lose their jobs.

c) availability of on the job training for low skilled workers - because of the increase in minimum wage, the workers who are getting training to get ready for the job, the number of such training facilities will decrease, because of the minimum wage, the employers will give training to less people to reduce cost of the training due to which on job training facilities will be deducted.  

d) Demand for high skilled workers which are good substitute for low skilled workers- Demand for high skilled workers will increase, as if they will be employed , the productivity will increase, there will be more profit as compared to unskilled workers.

Price floor and price ceiling

Price ceiling is the mandated maximum amount which a seller charges for a product.

Whereas, Price flooring is the government imposed lowest legal price which is always higher than the equilibrium price to be effective.

(Deadweight loss means loss in total surplus that occurs when the economy produces at an inefficient quantity).

A price floor will lead to a transfer of consumer surplus to producer surplus- price floor transfers some consumer surplus to producers which explains why the producers often favors them. However, sometimes both price floor and price ceiling block transactions between the producer and consumer and this leads to the Deadweight loss.

And, Sometimes A price ceiling will lead to a transfer of producer surplus to consumer surplus, but the gain to the consumers is always less than the loss to the producers which also leads to deadweight loss.

Both the price floor and the price ceiling block some transactions which the buyers and the sellers are willing to make and this creates the Deadweight loss.

It creates a deadweight loss because when the transactions between the buyers and sellers blocks which they are willing to make, in such a case, price and the quantities are not able to adjust with the equilibrium which causes deadweight loss and because of which the economy's social surplus decreases. It is a loss of surplus to society.