Question

Suppose there are two labor markets in a perfectly competitive industry; one regulated by the minimum wage and one not (not all firms have to follow a federally mandated minimum wage). Draw two graphs in equilibrium without regulation. If a binding minimum wage in placed in one market, show what happens to the quantity traded in that market and the wage and quantity in the unregulated market

Answer 1

Minimum binding wage creates excess supply in regulated labour market

Unregulated Wage market has usual equilibrium where market demand for labour = market supply of labour

Step-by-step explanation:

Unregulated markets are at equilibrium where market demand = market supply & demand, supply curves intersect. Market demand & market supply for labour are upward & downward sloping respectively, due to their respective positive & negative relationship with wage.

If price (wage) is more than equilibrium wage rate, excess demand creates competition among buyers & reduces wage rate. If price (wage) is less than equilibrium wage rate, excess supply creates competition among sellers & reduces wage rate.

Minimum wage set federally , is called Price [Wage] Floor. It is binding, if it is set above the equilibrium wage rate. It is usually kept to protect interest of sellers (employees here). This wage floor > equilibrium wage rate, creates excess supply in the labour markets, as supply is directly & demand is inversely related to wage rate.