Econ501aL16 - Interfering with Markets: Minimum Wage...

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Interfering with Markets: Minimum Wage Suppose the equilibrium wage would be .5 without a min- imum wage law. If Congress sets a minimum wage of .7, there is excess supply of labor at that price. 0 0.2 0.4 0.6 0.8 1 px 0.2 0.4 0.6 0.8 1 X minimum wage
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With the minimum wage in e f ect, the market price will be .7, since market forces will bid the wage down to the legal limit. The quantity of labor demanded is only .3, so that is also the quantity that can be supplied. Even if the jobs are rationed e ciently, with the work- ers enjoying the largest surplus getting the jobs, there is a deadweight loss , due to the missing triangle of total surplus. Since there is excess supply, there is no reason to suppose that jobs will be allocated e ciently. Someone willing to work for .2 might lose out to someone willing to work for .65. Those lucky enough to f nd a job bene f t from the mini- mum wage. Buyers of labor ( f rms) and those who are unemployed are worse o f .
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Firms may decide to employ higher skilled workers (whose wage is above the minimum) instead. In other words, demand for low skilled labor is likely to be highly elastic,
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Econ501aL16 - Interfering with Markets: Minimum Wage...

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