Question

4) Explain why the following statements are either true or false:

A: In a competitive labor market, a minimum wage above the market equilibrium will reduce the level of employment.
       

B: In a monopoly labor market, a minimum wage set above equilibrium will always reduce the level of employment.
        

C: In bilateral monopoly labor markets the monopoly employer and the union bargain to an outcome that is closer to a competitive equilibrium.
        

D: If two industries have identical labor supplies and operate in competitive labor markets then there is no reason for them to have different wage levels. 


Answer 1

A) The statement says that, minimum wage is above the equlibrium. At equlibrium the determined wage rate satisfies the labours. But if the minimum wage that the economy is willing to pay then more labor will be interested to work but labour demand will reduce. As a result employment decreases and there arises excess labor supply.
Thus the statement is true.

B) In a monopoly labour market also, if wage rate is greater than the wage at MR = MC then there will be reduction in demand for labour and unemployment will increase. Hence employment will decrease.
Thus the statement is true.

C) Such a burgaining will result in an employment outcome lesser than the competitive equilibrium. It is closer on not that can not be specified.
Thus the statement is wrong.

D) Since in a competitive market prices are fixed, thus the labour price or wages are fixed in the competitive labour market. Hence there is no way of having different wages.
Thus the statement is correct.