Question

A study of the effects of the minimum wage on employment of low-skilled workers estimated the price elasticity of demand for low-skilled workers is -0.75, and the price elasticity of supply is +0.25. Suppose that the government is considering raising the minimum wage from the current $6.00 per hour to $6.60 per hour. Suppose that at the current wage, 10 million workers have jobs. If the government increases the minimum wage, how much unemployment is created? Justify your answer. Make sure that someone can follow your work.

Answer 1

unemployment = 1 million (1,000,000) unemployed workers

calculation:

change in demand by employers:

Ed = % change in quantity/ % change in wages => -0.75 = % change in quantity/ 10%
So, % change in quantity = -7.5% ((7.5% of 10,000,000 = 750,000 will be less )
Labor demanded = 9,250,000 (10,000,000 - 750,000 = 9,250,000)

Change in supply of labor by workers:

Es = % change in quantity/ % change in wages => 0.25 = % change in quantity/ 10%
So, % change in quantity = 2.5% (2.5% of 10,000,000 will be more)
Labor supplied = 10,250,000 (10,000,000 + 250,000 = 10,250,000)

We see that supply is more than demand. So there will be unemployment to the extent of
10,250,000 - 9,250,000 = 1,000,000