Question

In the presence of a minimum wage law, which of the following statements is definitely true?

1. A fall in the labour supply will lead to a fall in wage rate.
2. A fall in the labour demand will lead to a rise in unemployment.
3. A fall in the labour demand will lead to a multiplier effect that causes further fall in labour demand.
4. None of the above.

Explain your answer.

Answer 1

Since the price floor is the legal minimum price which can be charged and it is set above the equilibrium price. It leads surplus of outputs.

It means due to price floor ( minimum wage law), there will be surplus of labor. It means the demand for labor is less than the supply of labor at the minimum wage rate. Hence there is surplus labor and therefore the minimum wage law leads unemployment in the economy. This unemployment arises due to the fall in the demand for labor at minimum wage rate.
hence it can be said that A fall in the labour demand will lead to a rise in unemployment.

Hence option b is the correct answer.