Answer to Question #105924 in Microeconomics for Francine DeYoung

Question

In Heartland, the minimum wage is currently $4.00 per hour and the fast food industry is the only industry that pays the minimum wage. 50% of the workers in the industry are between 16 and 21 years old. The president of Heartland, concerned about decreasing the proportion of families with incomes below the poverty line, proposes increasing the minimum wage by 20%.

a. Assume the labor market for low skilled workers is perfectly competitive. Explain why an increase in the minimum wage might reduce employment in the fast food industry.
b. Use supply and demand analysis to describe the likely effect of this increase in the minimum wage on the price and quantity sold of meals at fast food restaurants?
c. If an increase in the Minimum Wage will cause the Equilibrium Quantity of Minimum Wage Labor to decrease, would you then suggest that the Minimum Wage should not be increased? Why or Why not?

Answer 1

a. An increase in the minimum wage might reduce employment in the fast food industry, because this change will set the price floor, which will create inefficiency.

b. The quantity supplied will increase and the quantity demanded will decrease, as a result there will be a surplus of labor, so, the employment in the fast food industry will decrease.

c. If an increase in the Minimum Wage will cause the Equilibrium Quantity of Minimum Wage Labor to decrease, then we can suggest that the Minimum Wage should not be increased, because it will make the labor market inefficient and create deadweight loss.