Congress has raised the minimum wage. A government sibsidy could help employers

Question

Congress has raised the minimum wage. A government sibsidy could help employers finance the higher wage. 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 = 90- 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 $___

The equilibrium employment level is ___ million people per year.

With a minimum wage of $5.50, there would be ___ million people employed.

Explanation / Answer

At equilibrium, Labor supply and labor demand is equal.

LS = LD
10w = 90-10w

20w= 90

Equilibrium wage is $4.50.

Equilibrium employment level

LS = 10 x4.50 millions

      = 45 millions

At minimum wage of $4.50, labor supply will be:

LS = 10x5.5 = 55 million

Labor demand will be

LD = 90 – 10x5.5

      = 35 million

Therefore, there is only 35 million labor are demanded whereas supply is 55 million, hence only 35 million labor can only be employed.

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