A case study in this chapter discusses the federal minimum-wage law.

Suppose the minimum wage is above the equilibrium wage in the market for unskilled labor as shown on the following graph.

Use the grey point (star symbol) to indicate the market equilibrium wage and quantity of labor in the absence of a minimum wage. Then use the purple point (diamond symbol) to indicate the level of employment at the minimum wage provided, and use the orange point (square symbol) to indicate the quantity of labor supplied at this minimum wage. Next, use the tan segment (rectangle symbols) to indicate the level of unemployment at the minimum wage. Finally use the green polygon (triangle symbols) to show the total wage payments to unskilled workers.

Now suppose the secretary of labor proposes an increase in the minimum wage.

Indicate the effect this change in the minimum wage has on each of the following labor market components.

Increase Decrese

Employment

Unemployment

Complete the following table by indicating whether the elasticity of demand, the elasticity of supply, both, or neither affect the magnitude of the change in employment and unemployment.

Elasticity of Demand Elasticity of Supply

Employment

Unemployment   

If the demand for unskilled labor were inelastic, the proposed increase in the minimum wage would _______ the total wage payments to unskilled workers. This is ______ if the demand for unskilled labor were elastic.