Question

Minimum wage laws may cause unemployment if the legal minimum wage is set:

A.above the market wage, causing labour demand to be greater than labour supply.

B.below the market wage, causing labour demand to be greater than labour supply.

C.above or below the market wage - a minimum wage will always cause unemployment.

D.below the market wage, causing labour demand to be less than labour supply.

E.above the market wage, causing labour demand to be less than labour supply.

Answer 1

Option E is correct - above the market wage, causing labor demand to be less than labor supply

We know that the equilibrium wage rate (without the minimum wage law) is determined at the point where the market demand curve intersects the market supply curve and at that point demand of labor equals supply of labor and there is no unemployment in the economy.

Sometimes when this equilibrium wage rate which is defined naturally in the market is quite low, the government intervenes in the market and set minimum wage law by setting the legal wages above the equilibrium wage rate.

Now at the wage above this equilibrium wage, the demand falls short of the supply of labor in the economy (Demand of labor < Supply of labor). That means there is excess supply of labor in the economy.

This excess supply of labor causes unemployment in the economy.