Question

How does the elasticity of demand for labor affect the deadweight loss from an increase in the minimum wage? Why?

Answer 1

Ans. The mimum wage law increases the quantity supplied of labor because wages have increased and decreases quantity demanded of labor because cost of labor has increased. So, market is not in equilibrium and there is a surplus of labor. This causes a deadweight loss also.

If the demand for labor is inelastic, then minimum wage law will decrease the quantity demanded of labor by less amount than before. So, there will be less surplus labor and thus, lower deadweight loss. But if labor demand is more elastic than before than decrease in quantity demanded of labor is more than before increasing surplus labor in the market and thus, increasing deadweight loss.

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