Answer to Question #70968 in Economics for Joseph

Question

Consider a low-wage labor market. Workers in this market are not presently covered by the minimum wage, but the government is considering implementing such legislation. If implemented, this law would require employers in the market to pay workers a $5 hourly wage. Suppose all workers in the market are equally productive, the current market clearing wage rate is $4 per hour, and that at this market clearing wage there are 600 employed workers. Further suppose that under the minimum wage legislation, only 500 workers would be employed and 300 workers would be unemployed. Finally, assume that the market demand and supply schedules are linear and that the market reservation wage, the lowest wage at which any worker in the market would be willing to work, is $1.Compute the dollar value of the impact of the policy on a. Employers b.Workers c. Society as a whole.

Answer 1

The law would require employers in the market to pay workers a $5 hourly wage. The current market clearing wage rate is $4 per hour, there are 600 employed workers. Further suppose that under the minimum wage legislation, only 500 workers would be employed and 300 workers would be unemployed. The lowest wage at which any worker in the market would be willing to work, is $1.Compute the dollar value of the impact of the policy on a. Employers will be worse off, the dollar value of the impact of the policy is 600*4 - 500*5 = -$100 loss per worker per hour.
b.Such workers, who work will be better off, but unemployed will be worse off, the dollar value of the impact of the policy is $100 per worker per hour.
c. Society as a whole will be worse off, because there will be deadweight loss, as 300 workers will be unemployed.