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14 May, 00:09

Suppose there are two labor markets in a perfectly competitive industry; one regulated by the minimum wage and one not (not all firms have to follow a federally mandated minimum wage). Draw two graphs in equilibrium without regulation. If a binding minimum wage in placed in one market, show what happens to the quantity traded in that market and the wage and quantity in the unregulated market

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  1. 14 May, 03:53
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    Minimum binding wage creates excess supply in regulated labour market

    Unregulated Wage market has usual equilibrium where market demand for labour = market supply of labour

    Explanation:

    Unregulated markets are at equilibrium where market demand = market supply & demand, supply curves intersect. Market demand & market supply for labour are upward & downward sloping respectively, due to their respective positive & negative relationship with wage.

    If price (wage) is more than equilibrium wage rate, excess demand creates competition among buyers & reduces wage rate. If price (wage) is less than equilibrium wage rate, excess supply creates competition among sellers & reduces wage rate.

    Minimum wage set federally, is called Price [Wage] Floor. It is binding, if it is set above the equilibrium wage rate. It is usually kept to protect interest of sellers (employees here). This wage floor > equilibrium wage rate, creates excess supply in the labour markets, as supply is directly & demand is inversely related to wage rate.
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