Chapter 4, Problem 1VQP

To determine

Graphical representation of reduction in employment at minimum wage rate.

Explanation of Solution

The reduction in employment when the wage rate is set above the equilibrium is illustrated below:

In Figure 1, the horizontal axis represents the number of skilled labor and the vertical axis represents the wage rate. The equilibrium wage rate is at W_E, where the demand and supply of labors is N₁. If the minimum wage rate is increased above the equilibrium wage rate to W_M, the supply of labor increases to N₃ and the demand for labor reduces to N₂ from N₁. Thus, an increase in the minimum wage rate above the equilibrium wage rate will reduce the employment.

Economics Concept Introduction

Demand for labor: Demand for labor is defined as the quantity of labor demanded by the firms at different wage rates.

Supply of labor: Supply of labor refers tp the quantity of labor ready to work at the given wage rate.