In the diagram below, the economy is initially at point A. A binding minimum real wage (w) is introduced above the equilibrium wage. Which point represents actual employment?

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BlackTom AI · Accepted Answer

To understand which point represents actual employment after a binding minimum wage above the equilibrium, we need to connect the effect of a wage floor to employment.

- First, recognize that a binding minimum real wage means the wage is set above the market-clearing (equilibrium) wage. This creates a surplus of labor in the market: more workers are willing to work at that wage than there are jobs available from employers.

- In this diagram, the points labeled C, A, and B correspond to different quantities of labor (L2, L1, L3 respectively) at the wage floor level w̄. Point C lies on the labor demand curve (LD) at wage w̄ and aligns with L2, which is the quantity of labor that firms are willing to hire at the higher wage.

- Point A sits at the intersection of the demand and supply curves (the original equilibrium) at L1. This would be the employment level if there were no binding wage floor, so it does not reflect the new reality under the wage floor. Therefore, A is not actual employment after the policy.

- Point B lies on the labor supply side at the same wage floor, corresponding to L3. This represents the quantity of labor workers are willing to supply, not the number of workers actually employed by firms when the wage floor is in effect. Since the wage floor constrains hiring, employment is dictated by the employer’s demand, not by workers’ willingness to work.

- Putting it together, the actual employment level under a binding minimum wage above the equilibrium is the quantity of labor demanded at that wage. On the graph, that is L2, which corresponds to point C. Therefore, point C represents actual employment.

- In summary, the policy creates unemployment by pushing employment down to the level where firms’ demand for labor meets the higher wage, i.e., at C (L2). Points A and B do not reflect the constrained hiring outcome, and any other unlabeled point would not accurately capture the employment level under the wage floor.

ECON_002_001_25F Problem Set 3

In the diagram below, the economy is initially at point A. A binding minimum real wage (w) is introduced above the equilibrium wage. Which point represents actual employment?

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ECON_002_001_25F Problem Set 3

In the diagram below, the economy is initially at point A. A binding minimum real wage (w) is introduced above the equilibrium wage. Which point represents actual employment?

View Explanation

Log in for full answers

Similar Questions

Minimum wages create unemployment in markets where they create a

Labor Market Data Below is some hypothetical data on the labor market. Refer to Labor Market Data. If the government imposed a minimum wage of $7, what would unemployment be?

Part 1What is the effect of a minimum wage set above the equilibrium wage​ rate? Part 1When a minimum wage is set above the equilibrium wage​ rate, _______. A. unemployment decreases B. the supply of workers decreases C. job search activity decreases D. unemployment increases

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Making Your Study Simpler

Part 1What is the effect of a minimum wage set above the equilibrium wage rate? Part 1When a minimum wage is set above the equilibrium wage rate, _______. A. unemployment decreases B. the supply of workers decreases C. job search activity decreases D. unemployment increases