Minimum Wage and Unemployment in Microeconomics

Running head: MICROECONOMICS
Microeconomics
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MICROECONOMICS1
Table of Contents
Minimum wage and unemployment................................................................................................2
References........................................................................................................................................5

MICROECONOMICS2
Minimum wage and unemployment
Government takes price control measures such as price ceiling or price floor when free
market price fails to ensure maximum social welfare. Price floor refers to the legal minimum
price set by the government. Government restricts exchange of the good below the set minimum
price. Buyers causing buying the good at less than the floor price are subject to punishment
(Cowell, 2018). The justification given in supporting the policy is that sellers deserve a higher
price than that determined under the free market.
One practical application of price floor is the minimum wage in the labor market.
Minimum wage refers to the price floor set in the labor market. The minimum wage aims to
increase minimum wages for workers. Immediate effect of minimum wage is to create a labor
surplus in the economy and hence, unemployment. The size of surplus labor however depends on
the elasticity of labor demand. In case demand for labor is relatively inelastic meaning not much
price sensitive, an increase in wage does not reduce the labor demand much (Baumol & Blinder,
2015). Size of labor surplus is relatively small in this case. In case demand is relatively inelastic
in elastic in nature implying high price sensitive then there is significant reduction in labor
demand creating huge labor surplus and unemployment. The resulted labor surplus from
minimum wage can be explained with the economic model of demand and supply in the labor
market.