Suppose that the market for unskilled labour in Canada is such that the wage (price of labor) and employment (quantity of labor) are determined by supply and demand. Suppose further that the Canadian government, concerned by the low revenues on the market, decides to introduce a minimum wage. Suppose that initially the equilibrium wage is CAD 1000 and the equilibrium quantity of unskilled workers is 1,000,000 and that the government decides to impose a minimum wage of CAD 1200.
(a) Knowing that this minimum wage decreases employment (= the amount of unskilled workers who have a job) to 800,000 workers, find the wage elasticity of demand.
(b) What would the wage elasticity of supply be if 300,000 unskilled workers are unemployed at this minimum wage?
(c) Use a graph to illustrate the initial market equilibrium and illustrate the effect of the minimum wage on this market.