Question

Draw a supply and and demand for a labor market. Show and explain what happens if a minimum wages set above the equilibrium wage. If the demand for labor is inelastic with respect to price, would it make sense for workers to unionize and force the wage up? Explain.

Answer 1

A binding minimum wages is set above the equilibrium wage, when the minimum wage is set above the equilibrium the labour surplus will outweigh the labour demand. That is there is an excess supply of labour and this results in the unemployment, the graphical representation of the minimum wages are shown below.

If the demand is inelastic it makes the workers to unionize and force the wage up, when the demand for labour is inelastic the firm cannot be able to easily substitute the workers so the workers has got some kind of bargaining power and this can be used to force the wage up. When the demand for labour is elastic the employers can easily substitute the workers so the workers has got no voice here , in this situation if they demand more wages the firm will obviously fire the workers.