Labor Market - Exam Review




Fall 2009 Final TFU 18:

A minimum wage set above equilibrium wage reduces employment in the economy. 


This question implies a binding price floor. Drawing the standard labor supply model’s labor demand and supply curves: with w wages, w-under-bar the minimum wage. Note that “minimum wage set above equilibrium wage” implies w-under-bar is above w-star.



Labor demand: firms are only willing to hirer  number of workers at the wage w-under-bar.  Labor supply: but  number of workers are willing to work at the minimum wage w-under-bar.  Labor surplus: The difference between the number of people willing to work and the number of jobs firms are willing to hire is the labor surplus, and is equal to .  Reduction in employing: before the minimum wage equilibrium employment was , after the minimum wage, wages are at . The reduction in employment is equal to 


TRUE.