How do minimum wages affect wages employment and...

How do minimum wages affect wages, employment, and unemployment? In a competitive labor market, the demand for workers is given as QD = 10,000 - 100W, and the supply of workers is given as QS = 2,000 + 1,900W, where Q is the quantity of workers employed and W is the hourly wage. What is the initial equilibrium wage and employment level? Suppose that the government decides that $5 per hour is the minimum allowable wage in any market. How would this new minimum wage alter this market? What would the new employment level be? What would happen to total payments to labor? Would there be any excess supply of labor? If so, how much?

Transcript

00:01 All right, we are told that for a labor market, we have the following demand and supply equations dependent on the wage, where the demand for labor is basically how many people are hiring, and the supply of labor is basically how many people are looking for work.

00:15 And we're first asked to find what is the equilibrium price and quantity in this market.

00:19 So to do this, we just have to set supply and demand equal to each other.

00:29 And then with some algebra, we can work this out to get that 2 ,000 times a wage is equal to 10 ,000.

00:36 Minus 2 ,000 or 8 ,000.

00:39 Which means the wage is equal to 8 ,000 over 2 ,000 or 8 divided by 2, which is equal to $4 an hour.

00:51 So what is the quantity that occurs at a wage of $4 an hour? we can just plug this into one of our equations.

00:59 We'll get the same answer dependent on both.

01:04 So we get 10 ,000 minus 100 times 4, which gives us a quantity.

01:14 Labor of 9600 and you can also see that this is also equal to 2 ,000 plus 4 times 1900 showing again that we are in equilibrium.

01:26 All right, so q star is equal to 9600 workers and i guess instead of p star we should say w star or the equilibrium wage is $4.

01:37 But now we're told that there's a minimum wage of $5.

01:41 So what is going to happen to the market? so let's see.

01:44 We know that our equilibrium price is $4 and our minimum wage is above our equilibrium wage.

01:50 As a result, this is going to be binding...

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