In: Economics
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.
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.
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.
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.
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.
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)