DO NOT WRITE ON PAPER, WRITE WITH KEYBOARD 1. In an economy, L d = 125 5 , while

Question

DO NOT WRITE ON PAPER, WRITE WITH KEYBOARD

1. In an economy, Ld = 125 5 , while Ls = 20 +10 , where is the hourly wage rate.

A) What is the equilibrium level of employment and wage?

B) If the present minimum wage is $5.85/hr and the government raises it to $6.50/hr, how many workers will lose their jobs? What is the unemployment rate?

C) If instead the government voted to raise the minimum wage to $8/hr, how many workers will lose their jobs? What is the unemployment rate?

D) The workers who lose their jobs in (c) are able to move to another sector that is not covered by the minimum wage (and are willing to work for any positive wage). Before the unemployed workers arrive, aggregate labor demand and labor supply are given by

E) Ld = 190 20 and Ls = 15 + 5 , respectively. What is the equilibrium wage in the uncovered sector before and after the minimum wage is increased to $8/hr?

Explanation / Answer

A) Ld = Ls ( at equilibrium )

So , 125- 5w = 20 + 10w

or , w = $7 per hour and Ld = Ls = 20 + 10 (7) = 90 workers .

B) Minimum wage acts like a price floor . The wage is fixed at a certain level above equilibrium and is not allowed to fall below it . Here the equilibrium wage is $7 , so any minimum wage set below it will be inapplicale . If it is $6.50/hr , then it will be non-binding minimum wage . The market will move up to equilibrium ( $7 ) and there will be no unemployment .

C) If the minimum wage is raised to $8 then it becomes binding price floor since it is set above equilibrium .

At $8 : Supply of labor = 20 + 10w = 100 workers .

Demand for labor = 125 - 5w = 85 workers .

So unemployment = 100 - 85 = 15 units of workers .

Unemployment rate = No. of unemployed / Labor Force * 100 = 15 / ( 100 ) * 100 = 15%

D) Equilibrium in uncovered sector : Ld = Ls

190 - 20w = 15 +5w

or , w = 7 $

Now the equilibrium wage before minimum wage act is dollar 7 . After the minimum wage is set supply to this uncovered sector rises by 15 units . So aggregate supply = 15 + ( 15 + 5.7 ) = 65 units

Demand at equilibrium = 190 20 = 50 units

The supply curve shifts right after influx of labor . So equilibrium wage falls further in this uncovered sector . Ld = 65 , so wage = 190 - 65 / 20 = 6.25 $

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