Question

Suppose the supply curve for labor is backward bending over most of its range. The government now imposes a minimum wage in this labor market. What is the impact of the minimum wage on employment? Does it matter which of the two curves (supply or demand) is "more" downward sloping? Why?

Answer 1

The supply curve for labor is backward bending:-

The backward-bending labour supply curve occurs when an even higher wage actually entices people to work less and consume more leisure or unpaid time.

The graph shows that if real wages were to increase from W1 to W2, the substitution effect for an individual worker outweighs the income effect; therefore, the worker would be willing to increase hours worked for pay from L1 to L2. However, if the real wage increased from W2 to W3, the number of hours offered to work for pay would fall from L2 to L3

Minimum wage:-Governments often impose a minimum wage to raise the wages of workers who are earning very little.When the government imposes a minimum wage, firms are not permitted to pay less than the amount that the government mandates.

Effect the minimum wage on employment : It can set a wage that maximizes its profits. Unlike a competitive firm, however, a monopsony cannot hire as many workers as it wants at a constant wage.

Thr effects of minimum wages has stressed that the standard economic model, where increases in minimum wages depress employment, is not supported by the empirical findings in some labour markets.

The amount of labor hired in the market decreases. In our example, the number of unskilled workers employed decreases from 1,000 to 800. Thus while those who have jobs earn a higher wage, there are now some individuals who no longer have jobs. Employment has decreased.

At the government-imposed wage, there are more people who want to work than are able to find jobs. Thus the minimum wage has created unemployment. Because 1,250 people would like jobs at a wage of $5 but only 800 jobs are available, 450 people are unemployed; they would like a job at the prevailing wage, but they are unable to find one.

The two curves (supply or demand) is "more" downward sloping because:-

A demand curve shifting. D1 and D2 are alternative positions of the demand curve, S is the supply curve, and P and Q are price and quantity respectively. The shift from D1 to D2 means an increase in demand with consequences for the other variables

Generally assumed that demand curves are downward-sloping, as shown in the adjacent image. This is because of the law of demand: for most goods, the quantity demanded will decrease in response to an increase in price, and will increase in response to a decrease in price. Demand curves are used to estimate behaviors in competitive markets, and are often combined with supply curves to estimate the equilibrium price and the equilibrium quantity