Demand for labour is LD = 45 – 4W, labour supply is LS = 8W, where...

Demand for labour is LD = 45 – 4W, labour supply is LS = 8W, where W is hourly wage and L is labour measured in thousands of labour hours per year.

a) Find equilibrium employment and wage in a competitive labour market.

b) Suppose government introduces minimum wage at Wmin = $4. Calculate and show on diagram the number of jobs destroyed and the resulting unemployment.

c) Suppose that government introduces a wage subsidy program per hour: for each hour of employment firms receive unit subsidy of 75 cents. Calculate and show on a diagram: employment, wage paid by firms and wage received by workers, total wage bill (total labour cost), and total subsidy paid. What is the share of wage subsidy received by workers?

Solutions

Expert Solution

a) At equilibrium, demand of labor equals supply of labor

45 - 4Q = 8W

W = 3.75

At this W, labor hired is 30

b) If there is imposition of minimum wage of $4, labor supplied is 32 while labor demand is 29 which result in unemployment of 32 - 29 = 3

c) If there is subsidy of 0.75 cents, employment wage paid by firms is $3.25 while received by workers is $4. Total labor cost is 4 * 32 = 128 while total subsidy paid by government is 0.75 * 32 = 24. Share of subsidy received by workers is 33.33% while share of subsidy by employers is 66.67%.

Rahul Sunny answered 1 year ago

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