Question

Question 2: Draw the standard market diagram for a low-wage market that has enacted a binding minimum wage. Comment on the positive and negative effects (on low-wage workers and their families) of imposing a higher wage floor. Where possible, Illustrate your points by reference to your diagram

Answer 1

In the absence of the minimum wage, the market wage would be w₁ and Q₁ workers would be employed. With the minimum wage (w_m) imposed above w₁, the market wage is w_m, the number of employed workers is Q₂, and the number of workers who are unemployed is Q₃ - Q₂. Total wage payments to workers are shown as the area of rectangle ABCD, which equals w_m times Q₂.In the absence of the minimum wage, the market wage would be w₁ and Q₁ workers would be employed. With the minimum wage (w_m) imposed above w₁, the market wage is w_m, the number of employed workers is Q₂, and the number of workers who are unemployed is Q₃ - Q₂. Total wage payments to workers are shown as the area of rectangle ABCD, which equals w_m times Q₂. With an increase in the minimum wage would reduce employment. The size of the effect on employment depends only on the elasticity of demand. The elasticity of supply doesn’t matters at all as there is a surplus of labor. An increase in the minimum wage would increase unemployment. The size of the rise in unemployment depends on both the elasticities of supply and demand. The elasticity of demand determines the quantity of labor demanded, the elasticity of supply determines the quantity of labor supplied, and the difference between the quantity supplied and demanded of labor is the total amount of unemployment.