In a recent speech, the governor of your province announced: “One of the biggest

Question

In a recent speech, the governor of your province announced: “One of the biggest causes of juvenile delinquency in this province is the high rate of unemployment among 16 to 19-year old. The low wages offered by employers in the state have given fewer teenagers the incentive to find summer employment. Instead of working all summer, the way we used to, today’s teenagers slack off and cause trouble. To address this problem, I propose to raise the province’s minimum wage by $1.50 per hour. This will give teens the proper incentive to go out and find meaningful employment when they are not in school.” Do you agree or disagree with the governor? Please explain.

Explanation / Answer

I disagree with the statement.

If the minimum wage is imposed above free-market equilibrium wage rate, it is a binding price floor. At the higher wage rate, quantity of labor supplied will increase, but quantity of labor demanded will decrease, creating a surplus (excess supply of labor), which will increase unemployment. Those teenagers who will be able to get a job at higher wage rate will benefit, but those who will not be able to get a job (or will lose existing jobs) will be harmed. Therefore this policy will create a deadweight loss in labor market.

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