"Assume that a binding minimum wage does NOT shift the labour demand for unskilled labour. If...

"Assume that a binding minimum wage does NOT shift the labour demand for unskilled labour. If it is fairly easy to replace workers with machinery, then a rise in minimum wage will lead to an increase in the total wage bill (total revenue of all workers), all else equal." Do you agree? For full marks, you need to supply a graph.

(a) A graph carries 2.5 marks. The usual deductions for missing and incorrect labels apply.

(b) An explanation carries 2.5 marks. Your explanation must clearly relate to the relevant features of your graph - in other words, it must support your answer.

Expert Solution

A binding minimum wage will not shift the labour demand curve, but will cause a leftward movement along the curve. The quantity demanded of unskilled labourers will fall.

If it is easy to replace workers with machinery, then a rise in the minimum wage will actually decrease the total wage bill, because firms will now hire fewer workers.

Firms will replace the workers with machinery, to save on costs.

Therefore, the given statement is false.

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A binding minimum wage is always kept above equilibrium.

In the given diagram, total wage bill with lower minimum wage is rectangle OWBQ.

After higher minimum wage is set, this wage bill goes down, and is now rectangle OW"AQ".

As is visible, the old wage bill OWBQ is much higher than the new wage bill OW"AQ".

Rahul Sunny answered 2 years ago

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