Question

True or false?
 

A consequence of a minimum wage set above the equilibrium wage rate in the market for unskilled retail workers will be a surplus of unskilled retail workers

Answer 1

Solution:

Minimum wage acts as a price floor as it gives the lower threshold of price level for workers' service. Thus, whenever such price floor is above the equilibrium level, it is binding.

At an equilibrium level, we know that market always clears, that is the quantity demanded equals the quantity in supply. Thus, at equilibrium wage level, we know that the number of unskilled retail workers in demand by firms will be same as the supply of unskilled retail workers.

In this case, since minimum wage is set above the equilibrium wage rate, this is a binding constraint indicating that market will not clear. Now at such relatively higher wage rate, more number of unskilled retailers would enter the market and would want to provide service as now they can earn higher. Similarly, since the cost of hiring such workers has increased for firms, they will demand less of them at higher wage. So, there will be more number of unskilled workers in market willing to give their service, than what will be demanded. Clearly, therefore there will be a surplus of unskilled retail workers.

The given statement is TRUE.