Why unemployment increases when minimum wages are enacted Hal W. Snarr 10/20/2008 Click the mouse to execute show.

Labor Supply (workers supply their labor) Dollars Labor Supply 10,000 $5 Employment Will you work full time (40 hrs/wk) when the wage rate is $5 per hour? Probably not but maybe 10,000 workers will. S 80,000 $15 Will you work full time (40 hrs/wk) when the wage rate is $15 per hour? Maybe along with 79,999 other workers ,999 = 80,000 The labor supply curve is the line that connects these points.

Dollars Labor Demand 80,000 $5 Employment How many full-time workers will you and other fast-food restaurant owners hire when the wage rate is $5 per hour? Maybe 80,000 workers are hired. D 10,000 $15 How many full-time workers will you and other fast-food restaurant owners hire when the wage rate is $15 per hour? Maybe 10,000 workers are hired. The labor demand curve is the line that connects these points. Labor Demand (businesses demand labor) You are now a fast-food restaurant owner --one of many fast-food restaurant owners.

businesses hire 80,000 workers Labor Shortage When the wage rate is $5 per hour only 10,000 people work while Dollars 10,000 $5 Employment D 80,000 S The result of firms offering a wage equal to $5 is a shortage of 70,000 workers This shortage shrinks if firms offer a wage equal to $6 20,000 $6 70,000 labor shortage = 50,000 workers

Labor Shortage Dollars 35,000 $6 Employment D 55,000 S The shortage continues to shrink if firms offer a wage equal to $7 20,000 $7 70,000 labor shortage = 20,000 workers

Dollars 35,000 $8 Employment D 55,000 S The labor shortage disappears if firms offer the EQUILIBRIUM wage of $8 45,000 $7 labor shortage = 0 workers Labor Market Equilibrium Meaning all workers that want a job have a job.

but 80,000 workers are looking for work. Unemployment When the wage rate is $15 per hour firms hire only 10,000 workers Dollars 10,000 $15 Employment D 80,000 S The result of the wage being equal to $15 is a surplus of 70,000 workers. This surplus is referred to as unemployment. Unemployment falls if workers bid down the wage rate to $12 35,000 $12 65,000 unemployment = 30,000 workers

Dollars Employment D S 35,000 $12 65,000 $8 Unemployment disappears if firms offer the EQUILIBRIUM wage of $8 45,000 Unemployment = 0 workers Labor Market Equilibrium Meaning all workers that want a job have a job.

Suppose a politician says that the equilibrium wage of $8 per hour is too low. The effect of raising the minimum wage Dollars Employment D S 35,000 $12 65,000 $8 45,000 Before the minimum wage is enacted, unemployment is equal to zero. After the minimum wage is set at $12,unemployment increases to 30,000

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