In the context of a supply-demand diagram of the low-skill labour market, a minimum wage above the competitive equilibrium will reduce employment relative to the competitive equilibrium. Show that the total revenue earned by labour may nonetheless increase. Given such an increase, how that, if all workers have the same chance of losing their job the expected value of a worker's wage will rise.
To answer this question, let's first understand the concept of a supply-demand diagram in the low-skill labor market.
In this context, the supply-demand diagram represents the relationship between the quantity of low-skill labor supplied by workers and the quantity demanded by employers at various wage levels.
1. Minimum wage and employment: The competitive equilibrium in the labor market is established at the intersection of the supply and demand curves. At this equilibrium, the quantity of labor supplied is equal to the quantity demanded, and the wage is at an efficient level.
If a minimum wage is set above the competitive equilibrium, it creates a price floor for labor, meaning employers must pay workers at least the minimum wage. In this case, the minimum wage results in an increase in the wage level, but it also leads to a reduction in employment.
To illustrate this on a supply-demand diagram, you would need to draw the supply curve for low-skill labor, which represents the quantity of labor supplied at different wage levels. Then you would draw the demand curve, representing the quantity of labor demanded by employers at those wage levels. The point where the two curves intersect represents the competitive equilibrium. If you draw a minimum wage line above the equilibrium wage, it will help you see the impact it has on employment.
2. Total revenue earned by labor: Although a minimum wage above the competitive equilibrium reduces employment, it can still increase the total revenue earned by labor. This seemingly contradictory outcome occurs because the increased wage per worker outweighs the decrease in the number of workers employed.
To demonstrate this on a supply-demand diagram, you need to calculate the area of total revenue earned by labor. This area is equal to the wage rate multiplied by the quantity of labor employed. Comparing this area at the competitive equilibrium to the area after the minimum wage is implemented will show the change in total revenue earned by labor.
3. Increase in the expected value of a worker's wage: If all workers have an equal chance of losing their jobs due to the minimum wage, the expected value of a worker's wage will rise.
To understand this conceptually, consider that when the minimum wage is implemented, fewer workers are employed. This reduction in employment means that workers who remain have a higher probability of keeping their jobs, resulting in a more stable income. Therefore, when considering the average wage across all workers, the expected value of a worker's wage will rise.
It's important to note that while the total revenue earned by labor and the expected value of a worker's wage may increase in this scenario, it does not necessarily mean that all workers will be better off. Those who lose their jobs due to the minimum wage may face significant hardships.
By understanding the concepts of supply and demand, the impact of a minimum wage on employment, and the relationship between total revenue and the expected value of a worker's wage, we can analyze and explain the outcomes in the low-skill labor market.