Question

Suppose that, for example in India, a minimum wage is instituted in the modern sector above...

Suppose that, for example in India, a minimum wage is instituted in the modern sector above the market clearing wage, while the rural traditional wage is market determined at a lower level than in the modern sector.

  1. Describe the impact of this policy on the rural labor force, urban unemployment, and the rural wage.
  2. Will the modern sector wage be equal to the traditional sector wage after markets equilibrate through migration? Explain.
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Answer #1

A.Minimum wage above the market clearing wage in the urban sector would raise unemployment level because demand for labor would be more than the supply of labor.

Minimum wage below the market clearing wage wouuld not affect the demand or supply of labor because the wage rate would be equal to the equilibrium wage rate.This minimum wage in non-binding.

B.There won't be a transition from the rural to urban sector because because there is already unemployment in the urban sector.Migration from rural to urban sector would only increase the unemployment level.

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