Labor Markets

What do you think is the Federal hourly minimum wage?

1. $3.75

2. $4.85

3. $5.25

4. $5.85

5. $6.00

6. $6.85

7. $7.00

8. $8.00

9. $9.00

What do you think is the Federal hourly minimum wage?

1. $3.75

2. $4.85

3. $5.25

4. $5.85

5. $6.00

6. $6.85

7. $7.00

8. $8.00

9. $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. More than $15

2. $10-$15

3. $6-$10

4. $5-$6

5. Less than $5

6. I ‘ve never had a wage job.

7. 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) Labor supply is elastic.B) Labor supply is inelastic. C) Labor demand is elastic.D) Labor demand is inelastic. E) 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.

Quantity

Price

Old wage

Min wage

Min wage diagram

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.

Quantity

Price

Original Equilibrium

Price floor

Price floor above equilibrium

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.

Quantity

Price

Original Equilibrium

Price floor

Equilibrium Above the Price floor

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) Price and quantity both fall.

B) Price falls, quantity rises.

C) Neither changes.

D) Price rises, quantity falls.

E) 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) Price and quantity both fall.

B) Price falls, quantity rises.

C) Neither changes

D) Price rises, quantity falls.

E) 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) Fall by 20%.

B) Rise by 10%.

C) Fall by 10%.

D) Rise by 20%.

E) 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.