Question18 If the minimum wage is set above the equilibrium market wage, it is lower than firms are willing to pay for labor. increases unemployment. is effective and reduces unemployment. does not affect the market equilibrium. equals the black market wage. ResetMaximum marks: 1 Flag question undefined

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BlackTom AI · Accepted Answer

When the minimum wage is set above the equilibrium market wage, the wage floor is higher than the wage at which supply and demand for labor would clear the market. 
Option 1: 'is lower than firms are willing to pay for labor.' This is inconsistent with a minimum wage set above equilibrium; if it were lower, it would not be binding as a price floor at all. The point of a binding, above-equilibrium minimum wage is that firms would have to pay more than the market-clearing wage, not less.
Option 2: 'increases unemployment.' This aligns with standard supply-and-demand analysis: a higher legal wage makes hiring less attractive to some firms and keeps some workers unemployed who would have been employed at the lower, market-clearing wage. The surplus of labor (more workers seeking jobs at the higher wage than there are job openings) manifests as unemployment, assuming other factors constant.
Option 3: 'is effective and reduces unemployment.' While a higher minimum wage benefits workers who remain employed at that wage, it does not reduce unemployment; in fact, it can raise unemployment by pricing some workers out of the labor market. So this statement is generally incorrect in standard models.
Option 4: 'does not affect the market equilibrium.' In a binding above-equilibrium minimum wage, the market equilibrium is explicitly affected: quantity of labor supplied exceeds quantity of labor demanded, creating unemployment, which changes the effective employment level compared to the free-market equilibrium.
Option 5: 'equals the black market wage.' The black market wage is typically determined by illegal or informal hiring under the table; a legal minimum wage set above equilibrium does not equal the black market wage, and in fact can reduce incentives for illegal employment, though the exact dynamics depend on enforcement and other factors. This option misstates the relationship between legal wage floors and illegal labor markets.
In summary, the binding, above-equilibrium minimum wage creates a gap between labor supplied and labor demanded, generating unemployment, which makes option 2 the descriptively accurate choice among the given statements.

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