A case study in this chapter discusses the national minimum wage.

a)

Suppose the minimum wage is above the equilibrium wage in the market for unskilled

labour. Using a supply-and-demand diagram of the market for unskilled labour, show the

market wage, the number of workers who are employed and the number of workers who are

unemployed. Also show the total wage payments to unskilled workers.

b)

Now suppose that the Fair Work Commission proposes an increase in the minimum wage.

What effect would this increase have on employment? Does the change in employment

depend on the elasticity of demand, the elasticity of supply, both elasticities or neither?

c)

What effect would this increase in the minimum wage have on unemployment? Does the

change in unemployment depend on the elasticity of demand, the elasticity of supply, both

elasticities or neither?

d)

If the demand for unskilled labour were inelastic, would the proposed increase in the

minimum wage raise or lower total wage payments to unskilled workers? Would your answer

change if the demand for unskilled labour were elastic?