Question

The price elasticity of demand for labor in economy A is 0.15. The price elasticity of demand for labor in economy B is 1.7. In both economies the minimum wage is increased from $12 to $14 per hour. Will there be a significant drop in employment in economy A? Will there be a significant drop in employment in economy B? Explain your answers.

Answer 1

It is given that the price elasticity of demand in A is a less than the price elasticity of demand in B. when there is an increase in the minimum wage we know that there is an increase in unemployment because quantity of labour demand decreases and quantity of labour supplied increases.

However when demand is relatively inelastic, the decline in quantity of labour demanded is very small. This shows that in this case, economy A will experience a smaller increase in unemployment while economy B will experience a greater increase in unemployment.

This also shows that economy B will show a greater drop in employment because of relatively elastic demand.