What happens when the minimum wage is set above the equilibrium wage?

What happens when the minimum wage is set above the equilibrium wage?

Minimum wage behaves as a classical price floor on labor. Standard theory says that, if set above the equilibrium price, more labor will be willing to be provided by workers than will be demanded by employers, creating a surplus of labor, i.e. unemployment.

What happens when there is a decrease in wages?

A decrease in the wages causes an increase (rightward shift) of the short-run aggregate supply curve. Other notable aggregate supply determinants include the technology, energy prices, and the capital stock. Wages are an example of a resource price aggregate supply determinant.

What is the effect of a minimum wage in a competitive Labour market?

In a competitive labor market, an increase in the minimum wage reduces employment and increases unemployment. A minimum wage could increase employment in a monopsony labor market at the same time it increases wages.

What is the effect of a minimum wage in a low skill labor market?

If the market wage is low, a binding minimum wage can make employment more attractive to workers, which strengthens their search efforts and so reduces unemployment. If the market wage is high, a binding minimum wage might discourage workers from looking for a job because there are fewer vacancies.

Why do wages decrease?

A decline in productivity growth, leading to lower economic growth and lower scope for wage growth. Net migration has been suggested as a reason for low wage growth, especially for unskilled workers. Knock on effect of growing wealth inequality (e.g., cost of housing associated with rising house prices)

Why is a perfectly competitive firm a wage taker?

In a perfectly competitive labor market, the individual firm is a wage‐taker; it takes the market wage rate as given, just as the firm in a perfectly competitive product market takes the price for its output as given.

What is a binding minimum wage?

“A minimum wage is binding if it is set above the equilibrium wage (Parkin, et al., 2008)”. “With a binding minimum, wage adjustments are blocked and the market is prevented from allocating labour resources (Parkin, et al., 2008)”.

Is there a way to increase both wage and employment?

Labor Demand An increase in the demand for labor will increase both the level of employment and the wage rate.

Why are firms in a purely competitive labor market a wage?

As a result, individual firms and individual workers are wage takers since neither can exert any control over the market wage rate. Chapter 13, Problem 2Q is solved.

What is the total wage cost to the firm?

Given the competitive market for labor in the diagram on the left, show the equilibrium quantity of labor hired by the firm and the wage rate paid. B.) What is the total wage cost to the firm?

How does the marginal product of Labor affect the wage rate?

The marginal product of labor (MPL) is decreasing; Firms are price-takers in the goods market (cannot affect the price of output) as well as in the labor market (cannot affect the wage rate); The supply of labor is elastic and increases with the wage rate (upward sloping supply); and. Firms are profit-maximizers.

Is there an equilibrium wage rate in the labor market?

According to the basic theory of the labor market, there ought to be one equilibrium wage rate that applies to all workers across industries and countries. Of course this is not the case; doctors typically make more per hour than retail clerks, and workers in the United States typically earn a higher wage than workers in India.

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