Labor market and the minimum wage: Assume that workers are all alike and that firms maximize...

Labor market and the minimum wage: Assume that workers are all alike and that firms maximize profit. If the labor market were perfectly competitive, the equilibrium wage would be $10/hr. If the labor market were monopsonistic, the equilibrium wage would be $8/hr.
1. First assume a perfectly competitive labor market. Show (using a demand-supply graph) what happens to total employment if a $9/hr minimum wage is enforced by the government.
2. Again assuming a perfectly competitive labor market, show (using a demand-supply graph) what happens to total employment if a $20/hr minimum wage is enforced by the government.
3. Now assume that the labor market is monopsonistic. Discuss what will happen (no need to show demand-supply graph) to total employment if a $9/hr minimum wage is enforced by the government.
4. Again assuming a monopsonistic case, discuss what will happen (no need to show demand- supply graph) to total employment if a $20/hr minimum wage is enforced by the government.

Solutions

Expert Solution

1. When minimum wage is at $9, demand for labour is greater than supply of labour thereby creating labour shortage.

2. When minimum wage is at $20, supply of labour is greater than demand for labour thereby creating labour surplus.

3. In the monopsonistic market, the equilibrium wage is $8.

If the minimum wage is $9, then Marginal Factor Cost = $9.

In the monopsonisitc market with no minimum wage, the employer faced a upward sloping MFC, but with minimum wages, the employer faces a constant MFC of $9, thus every additional labourer has to be paid only $9.

Therefore, the labour demanded by a monopsonist increases with a minimum wage

Since minimum wage ($9 ) is greater than monopsony wage ( $8), labour supplied increases.

At $9, labour supplied < labour demanded

4. At minimum wage = $20, MFC = $20

MFC cuts MRC at a very low labour demand level. But labour supplied at $20 is very high

Hence, at minimum wage = $20, labour demand < labour supplied ----> surplus labour

(monopsonist chooses that quantity of labour where MFC = MRP)

Rahul Sunny answered 1 year ago

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