Question

Recently, President Obama proposed changing the minimum wage from the current level of $7.25/hour to $9/hour. Under which of the following conditions would such a change cause no job losses (please select all that you feel might apply)?

If currently no employees are paid less than $9/hour in the US.

If it is impossible for firms to substitute away from labor (i.e. the demand for labor, particularly the low-skilled labor that might be affected by the minimum wage) is vertical or perfectly inelastic.

If the current market equilibrium wage for low-skilled workers is between $7.25 and $9 per hour and the demand for labor and the supply of labor are consistent with the law of demand and the law of supply.

Answer 1

First two statements are correct

First statement suggests that the market wage is already higher than the wage rate of $9 per hour so that when minimum wage reaches $9 per hour, it becomes ineffective (non binding)

Second statement suggests that demand is vertical so when minimum wage is increased, firms still hire same number of workers so there are no job losses.

Third statement is incorrect because if demand and supply curves are fairly elastic and equilibrium wage for low-skilled workers is between $7.25 and $9 per hour, then a minimum wage of $9 per hour will be binding and create unemployment.