From time to time, Congress has raised the minimum wage. Some people suggested t
ID: 1189231 • Letter: F
Question
From time to time, Congress has raised the minimum wage. Some people suggested that a government sibsidy could help employers finance the higher wage. This exercise examines the economics of a minimum wage and wage subsidies. Suppose the supply of low-skilled labor is given by:
LS = 10w
where LS is the quantity of low-skilled labor (in millions of persons employed each year), and w is the wage rate (in dollars per hour). The demand for labor is given by:
LD = 80- 10w
What will be the free-market wage rate and employment level? Suppose the government sets a minimum wage of $5.50 per hour. How many people would then be employed? (Round answer to two demal places.)
The equilibrium wage is $4
The equilibrium employment level is 40 million people per year.
With a minimum wage of $5.50, there would be 25 million people employed.
Suppose that instead of a minimum wage, the government pays a subsidy of $1.50 per hour for each employee. What will the total level of employment be now? What will the equilibrium wage rate be? (Round response to two decimal places.)
With a subsidy of $1.50, the total level of employment is __ million people per year,
and the wage rate is $ ___.
Explanation / Answer
Equilibrium is established where:
Ls = Ld
10w = 80 - 10w
w=$4
Employment level = 40
If the government sets minimum wage at $5.5, 25 million labour will be employed
With the wage rate at $4 and subsidy at $1.5, labour demand remains the same at 40 million while labour supply will be 55 million.
Total level of employment in this scenario will be 40 million and wage rate $4.
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