Suppose we analyze a labor market that is characterized by low wages and for which the government is contemplating adopting minimum wage legislation. The minimum wage law under consideration requires employers active in this labor market to pay workers at least a $10 hourly wage. For simplicity, assume homogeneity is the L-productivity on the market, i.e. that all workers are equally productive. The current unregulated market equilibrium wage rate is $9 per hour, and at this market clearing wage there are 600 employed workers. Suppose that under the minimum wage legislation, only 550 workers would be employed, yet more people enter the labor market and some 200 workers would be unemployed. Assume that the market demand and supply curves are linear and that the market reservation wage, the lowest wage at which any worker in the market would be willing to work, is $3. The higher minimum wage reduces the need for social assistance for ‘working poor’ employed workers by $200. Finally, suppose the workers who lose their jobs are equally distributed along the linear labor supply curve between the reservation wage and the market wage.

Represent the problem graphically and clearly label all elements. From a cost-benefit perspective, determine the value of the impact of this minimum wage policy on employers, on workers, and on society as a whole?

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In the graph below we have a standard supply and demand curve representing the labor market The xaxi... View the full answer