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Chapter 4: Q. 22 (page 105)

Suppose that a 5% increase in the minimum wage causes a 5% reduction in employment. How would this affect employers and how would it affect workers? In your opinion, would this be a good policy?

Short Answer

Expert verified

Firms respond by substituting labor with physical capital or cut down the production.

Step by step solution

01

Step 1. Definition

A minimum wage, to be effective, needs to be set above the market wage level. When this happens, employers must follow minimum wage guidelines. Not all workers will actually benefit from higher wages.

02

Step 2. Explanation

From a macroeconomic standpoint, the reduction in employment is contributing to higher unemployment rate. The benefit of rise in minimum wage goes only to those workers who are unskilled and were working at the minimum wage level. Those who were already earning higher would not be affected by it. At the same time, 5% of workers are losing their jobs.

For employers, the rise in minimum wage would increase their cost of production. They would compensate by reducing production and reducing input used.

The policy can be considered good only if the gain from higher wages would be greater than the loss from increased unemployment.

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Most popular questions from this chapter

Predict how each of the following economic changes will affect the equilibrium price and quantity in the financial market for home loans. Sketch a demand and supply diagram to support your answers.

  1. The number of people at the most common ages for home-buying increases.
  2. People gain confidence that the economy is growing and that their jobs are secure.
  3. Banks that have made home loans find that a larger number of people than they expected are not repaying those loans.
  4. Because of a threat of a war, people become uncertain about their economic future.
  5. The overall level of saving in the economy diminishes.
  6. The federal government changes its bank regulations in a way that makes it cheaper and easier for banks to make home loans.

Suppose the U.S. economy began to grow more rapidly than other countries in the world. What would be the likely impact on U.S. financial markets as part of the global economy?

If the government imposed a federal interest rate ceiling of 20% on all loans, who would gain and who would lose?

Which of the following changes in the financial market will lead to an increase in the quantity of loans made and received: a. a rise in demand b. a fall in demand c. a rise in supply d. a fall in supply

Predict how each of the following economic changes will affect the equilibrium price and quantity in the financial market for home loans. Sketch a demand and supply diagram to support your answers.

a. The number of people at the most common ages for home-buying increases.

b. People gain confidence that the economy is growing and that their jobs are secure.

c. Banks that have made home loans find that a larger number of people than they expected are not repaying those loans. d. Because of a threat of a war, people become uncertain about their economic future.

e. The overall level of saving in the economy diminishes.

f. The federal government changes its bank regulations in a way that makes it cheaper and easier for banks to make home loans.
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