Question

LABOR MARKET CONDITIONS: BASICS
Suppose the demand for high school teachers (Ld) satisfies the equation:

Ld = 3,000 – 35W,
where L is the number of high school teachers (measured in thousands of persons) and W is the high school teacher salary (measured in thousands of dollars).

Suppose the supply of high school teachers (Ls) satisfies the equation: Ls = -500 + 25W.

1. Using the information above, demonstrate and explain how many high school teachers will be employed (remember, L is measured in thousands of persons); demonstrate and explain what salary will prevail for high school teachers (remember, W is measured in thousands of dollars).

2. Suppose the government enacts a minimum salary of W = 60 for high school teachers. Now how many teachers will be employed and what salary will prevail? Demonstrate and explain. As a result of the mandated minimum salary, what situation will have been created in the market for teachers? Demonstrate and explain.

3. Suppose the government enacts a maximum salary of W = 50 for high school teachers. Now how many teachers will be employed and what salary will prevail? Demonstrate and explain. As a result of the mandated maximum salary, what situation will have been created in the market for teachers? Demonstrate and explain.

4. Refer back to the situation in Part A. Is your solution for the number of high school teachers employed realistic? Is your solution for the market salary for high school teachers realistic? Using data from bls.gov (and bls.gov only), report whether or not the solutions from Part A are or are not realistic.

Answer 1

We have the demand for high school teachers Ld = 3,000 – 35W, here W is in ($’000). Similarly, the supply of high school teachers is Ls = -500 + 25W.

1. At the equilibrium, school teachers will be employed demonstrate and the salary that will prevail for high school teachers is $. This is shown below

Ls = Ld

-500 + 25W = 3000 – 35W

3500 = 60W

W* = $58,333 and L* = 958,333.

2. Suppose the government enacts a minimum salary of W = 60 for high school teachers. Now, at this rate we see that

Ls = -500 + 25*60 = 1000 (‘000) and Ld = 3000 – 35*60 = 900 (‘000). Hence at this rate, 900,000 teachers will be employed they all receive a salary of $60,000 which is fixed by law. As a result of the mandated minimum salary, there is a surplus of teachers or shortage of vacancy that has been created in the market for teachers. This results in unemployment of teachers and is about (1000 – 900) = 100,000 teachers.

3. Suppose the government enacts a maximum salary of W = 50 for high school teachers. Now, at this rate we see that

Ls = -500 + 25*50 = 750 (‘000) and Ld = 3000 – 35*50 = 1250 (‘000). Hence at this rate, 500,000 teachers will be employed they all receive a salary of $50,000 which is fixed by law. As a result of the mandated minimum salary, there is a shortage of teachers or surplus of vacancy that has been created in the market for teachers. This results in a shortage of teachers and is about (1250 – 750) = 500,000 teachers.

4) The salaries of teachers are not as high as $58,000. In fact there are schools where this does not even surpass $20,000. Hence we do not consider these wage rates to be realistic.