Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 5: Problem 6

In many European countries high minimum wages have led to high levels of unemployment and underemployment, and a two-tier labor system. In the formal labor market, workers have good jobs that pay at least the minimum wage. In the informal, or black market for labor, workers have poor jobs and receive less than the minimum wage. a. Draw a demand and supply diagram showing the effect of the imposition of a minimum wage on the overall market for labor, with wage on the vertical axis and hours of labor on the horizontal axis. Your supply curve should represent the hours of labor offered by workers according to the wage, and the demand curve represents the hours of labor demanded by employers according to the wage. On your diagram show the deadweight loss from the imposition of a minimum wage. What type of shortage is created? Illustrate on your diagram the size of the shortage. b. Assume that the imposition of the high minimum wage causes a contraction in the economy so that employers in the formal sector cut their production and their demand for workers. Illustrate the effect of this on the overall market for labor. What happens to the size of the deadweight loss? The shortage? Illustrate with a diagram. c. Assume that the workers who cannot get a job paying at least the minimum wage move into the informal labor market where there is no minimum wage. What happens to the size of the informal market for labor as a result of the economic contraction? What happens to the equilibrium wage in the informal labor market? Illustrate with a supply and demand diagram for the informal market. Solution a. The shortage created is a shortage of jobs: at the minimum wage there are more job-seekers than there are jobs available. b. The contraction in the economy causes the demand for labor to fall, shifting the demand curve leftwards from \(\mathrm{D}\) to its new position at \(\mathrm{D}^{\prime}\). Both the deadweight loss and the shortage of jobs caused by the minimum wage increase as a result of the fall in the demand for labor. c. As a result of the economic contraction which reduces the demand for workers in the overall market, workers move to the informal labor market. This increases the supply of labor in the informal labor market. The supply curve for labor shifts rightwards from \(S\) to its new position at \(S^{\prime}\). The equilibrium wage in the informal labor market falls from \(w^{*}\) to \(w^{* *}\) and the quantity of hours transacted increases from \(Q^{*}\) to \(Q^{* *}\), as the informal labor market expands.Solution a. The shortage created is a shortage of jobs: at the minimum wage there are more job-seekers than there are jobs available. b. The contraction in the economy causes the demand for labor to fall, shifting the demand curve leftwards from \(\mathrm{D}\) to its new position at \(\mathrm{D}\) '. Both the deadweight loss and the shortage of jobs caused by the minimum wage increase as a result of the fall in the demand for labor. c. As a result of the economic contraction which reduces the demand for workers in the overall market, workers move to the informal labor market. This increases the supply of labor in the informal labor market. The supply curve for labor shifts rightwards from \(S\) to its new position at \(S^{\prime}\). The equilibrium wage in the informal labor market falls from \(w^{*}\) to \(w^{* *}\) and the quantity of hours transacted increases from \(Q^{*}\) to \(Q^{* *}\), as the informal labor market expands.

Short Answer

Expert verified
Answer: The exercise comprises three parts: a) Analyzing the effect of a minimum wage on the labor market: The imposition of a high minimum wage generates a shortage of jobs as the quantity of labor supplied surpasses the quantity of labor demanded. b) Studying the consequences of an economic contraction: The demand for labor decreases, causing an increase in job shortage and deadweight loss. c) Examining the influence of the economic contraction on the informal labor market: The equilibrium wage decreases, and the quantity of labor transactions increases in the informal labor market as workers move away from the formal labor market.

Step by step solution

01

a. Draw the demand and supply diagram of the labor market

Start by drawing the demand and supply diagram for labor. The demand curve represents the hours of labor demanded by employers based on wage levels, and the supply curve represents the hours of labor offered by workers based on wage levels. Both curves intersect at the equilibrium point \((w^*, Q^*)\). Now, impose a minimum wage above the equilibrium wage. This creates a new point where the supply and demand curves intersect the minimum wage line. Mark the new quantity of labor demanded and the quantity of labor supplied at this wage level, causing a surplus of labor supply.
02

a. Identify the shortage and its size

The minimum wage imposition creates a job shortage: there are more people willing to work at this wage than there are jobs available. The size of the shortage can be measured as the difference between the quantity of labor supplied and the quantity of labor demanded at the minimum wage.
03

b. Illustrate the effect of the economic contraction on the labor market

A contraction in the economy results in employers in the formal sector cutting production and demand for workers. This causes the demand for labor to decrease, shifting the demand curve leftward from \(D\) to \(D'\). Both the deadweight loss and the job shortage increase as a result of the decrease in the demand for labor. Update the diagram to reflect these changes.
04

c. Analyze the effect on the informal labor market

Due to the economic contraction and reduced demand for workers in the formal labor market, more workers move to the informal labor market. This causes an increase in the supply of labor in the informal market, shifting the supply curve rightward from \(S\) to \(S'\).
05

c. Show the effect on the equilibrium wage in the informal labor market

With the shift of the supply curve in the informal labor market, the new equilibrium point is reached at a lower wage level (\(w^{**}\)) and a higher quantity of labor transactions \((Q^{**})\). Draw a supply and demand diagram for the informal labor market to illustrate these changes.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

In the late eighteenth century, the price of bread in New York City was controlled, set at a predetermined price above the market price. a. Draw a diagram showing the effect of the policy. Did the policy act as a price ceiling or a price floor? b. What kinds of inefficiencies were likely to have arisen when the controlled price of bread was above the market price? Explain in detail. One year during this period, a poor wheat harvest caused a leftward shift in the supply of bread and therefore an increase in its market price. New York bakers found that the controlled price of bread in New York was below the market price. c. Draw a diagram showing the effect of the price control on the market for bread during this one-year period. Did the policy act as a price ceiling or a price floor? d. What kinds of inefficiencies do you think occurred during this period? Explain in detail.

Many college students attempt to land internships before graduation to burnish their resumes, gain experience in a chosen field, or try out possible careers. The hope shared by all of these prospective interns is that they will find internships that pay more than typical summer jobs, such as waiting tables or flipping burgers. a. With wage measured on the vertical axis and number of hours of work on the horizontal axis, draw a supply and demand diagram for the market for interns in which the minimum wage is non-binding at the market equilibrium. b. Assume that a market downturn reduces the demand for interns by employers. However, many students are willing and eager to work in unpaid internships. As a result, the new market equilibrium wage is equal to zero. Draw another supply and demand diagram to illustrate this new market equilibrium. As in Figure 5 -7, include a shaded triangle that represents the deadweight loss from the minimum wage. Using the diagram, explain your findings.
See all solutions

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free