Labor Markets
What do you think is the Federal
hourly minimum wage?
1.
2.
3.
4.
5.
6.
7.
8.
9.
$3.75
$4.85
$5.25
$5.85
$6.00
$6.85
$7.00
$8.00
$9.00
What do you think is the Federal
hourly minimum wage?
1.
2.
3.
4.
5.
6.
7.
8.
9.
$3.75
$4.85
$5.25
$5.85
$6.00
$6.85
$7.00
$8.00
$9.00
Minimum wage
• The minimum wage is now $5.85. By
recent legislation, it will rise to $6.55 in
mid 2008 and to $7.25 in mid 2009.
History of U.S. minimum wage
State Minimum wages
•
•
•
•
•
•
•
California $7.50, will be $8.00 in 2008.
Massachusetts $7.50
New York $7.15
Oregon $7.80
Washington $7.93
Illinois $7.50
Michigan $7.15
Not covered by min wage law
• Agricultural workers
• Workers under 20 years of age
• Small business employees (under $500,000
gross)
What was your hourly wage in
your most recent job?
1.
2.
3.
4.
5.
6.
7.
More than $15
$10-$15
$6-$10
$5-$6
Less than $5
I ‘ve never had a wage job.
I don’t remember.
A minimum wage rate is set 20%
higher than the equilibrium wage.
This causes total wages received by
laborers to rise only if
A)
B)
C)
D)
E)
Labor supply is elastic.
Labor supply is inelastic.
Labor demand is elastic.
Labor demand is inelastic.
Employers are irrational.
Why is that?
• Minimum wage moves quantity to a point
on which curve? Demand or supply?
• On the DEMAND curve. Firms are not
forced to hire more labor than they want.
• If you move up the demand curve and
revenue rises, is demand elastic or inelastic?
• Inelastic.
Min wage diagram
Price
Min wage
Old wage
Quantity
If a price floor is set on some
good at a price higher than its
equilibrium price,
A) The good will be in excess supply.
B) The good will be in excess demand.
C) Neither prices nor quantities will be affected.
Price floor above equilibrium
Price
Price floor
Original
Equilibrium
Quantity
If a price floor is set on some
good at a price lower than its
equilibrium price,
A) The good will be in excess supply.
B) The good will be in excess demand.
C) Neither prices nor quantities will change.
And why is that?
• Price floor says it is illegal to sell at a price
below the specified floor.
• If floor is below equilibrium price, the
equilibrium price satisfies this restriction.
• The restriction is non-binding and doesn’t
affect outcome.
Equilibrium Above the Price floor
Price
Original
Equilibrium
Price floor
Quantity
And back to our lecture…
Leave your Clicker on, We’ll be clicking again later…
The supply curve slopes up. The demand
curve slopes down. If a price ceiling is set at a
price lower than the equilibrium price, what
happens to the price and the quantity sold?
A)
B)
C)
D)
E)
Price and quantity both fall.
Price falls, quantity rises.
Neither changes.
Price rises, quantity falls.
Price falls, quantity rises.
Why is that?
The supply curve slopes up. The demand
curve slopes down. If a price ceiling is set at a
price higher than the equilibrium price, what
happens to the equilibrium price and quantity?
A)
B)
C)
D)
E)
Price and quantity both fall.
Price falls, quantity rises.
Neither changes
Price rises, quantity falls.
Price falls, quantity rises.
Why is that?
• If price ceiling is higher than equilibrium
price, it does not forbid equilibrium price.
The demand elasticity is –1/2. The supply
elasticity is +1. A price ceiling that is
20% below equilibrium price will cause
the new equilibrium quantity to
A)
B)
C)
D)
E)
Fall by 20%.
Rise by 10%.
Fall by 10%.
Rise by 20%.
Remain unchanged.
Why is this?
• Price ceiling forces price down by 20% and
results in excess demand.
• New quantity will be on supply curve.
Suppliers are not forced to sell.
• Supply elasticity is 1, so a 20% fall in price
results in a 20% fall in quantity.