Question

Suppose that there are two types of workers in the labor market, type A (low skilled) and type B (high skilled). The market for type A is at equilibrium while the market for type B workers currently exhibits a surplus of workers. Discuss the effect of the introduction of a minimum wage in the market for type A workers on the quality of workers hired in the type A market and on the distribution of workers across the two markets –The use of graphs, whenever appropriate, is of course encouraged.

Answer 1

Surplus indicates an excess supply of labor over its demand. Surplus of labor is there in high-skilled market. The low-skilled market is in equilibrium. If there is the minimum wage in low-skilled market, the demand for labor would be low compared to its supply of labor; creating a surplus too.   

In this situation workers flow from high-skilled to low-skilled market. Firms would be interested to hire those high-skilled workers.

The graphs are as below:

The current scenario: E is the equilibrium in the low-skilled market, where the corresponding equilibrium price is P and quantity of labor is Q. In the high-skilled market Pc is the current price, which creates surplus of LK.

Minimum wage: it is introduced in low-skilled market, which is Pm. This creates surplus of labor of SU. Since (Pm > Pc), labors flow from high-skilled to low-skilled market. Firms in the low-skilled market will get high-skilled labors at no additional cost; therefore, they will hire them, making unemployment issue for low-skilled workers. The supply of labor in the high-skilled market will be reducing slowly and this helps to reach at equilibrium (Eh), where the corresponding price is Ph.