Question

In: Economics

Do you think that a price floor such as a minimum wage will result in a...

Do you think that a price floor such as a minimum wage will result in a surplus of labor and hence unemployment?

Please be super detailed, I'm not the best at understanding the stance I'm asked to take.

Solutions

Expert Solution

The vertical axis represents price and the horizontal axis represents quantity. The equilibrium or market price (rate) for labor is P. The price set above P that is P1 is the price floor; it arises because of the minimum wage. At P1 price labor supply is higher than labor demand, indicating a surplus; the distance of DV is the surplus and unemployment.

Price floor: This is the price of labor set by the government above the market equilibrium price. Such price gives assistant to the laborers who are otherwise selling their labor at lower price.

The minimum wage policy is a price floor restricted by the government in wages payment. The wage could be hourly, weekly, daily, or monthly basis but it should equal or cross the minimum limit prescribed by the law.

Key-points of minimum wage are discussed below:

1.It increases income of workers.

2. It raises price of the products, since the cost of production in terms of labor cost increases.

3. It increases unemployment problem, since the jobs of few employees could be terminated for securing the minimum wage of remaining employees.

4. It hurts business, since getting market of higher-priced products could be difficult.


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