After you have studied Economics in the News on pp. 186–187, answer the following questions.

a. If the federal minimum wage rate increases to

$15 an hour, what do you expect will happen to unemployment? Illustrate your answer with a graph.

b. Describe the gains and losses that will arise if the federal minimum wage is raised to $15 an hour and employers find ways of making labor more productive.

c. If the minimum wage had kept pace with productivity increases, what do you expect would have happened to employment and unemployment of low-skilled labor?

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The federal minimum wage rate of $7.25 an hour was set in 2009 when the median wage rate was $12.44 an hour. Over the years since 2009, the median wage rate has in- creased to $20.17 an hour and the minimum wage has fallen from 58 percent of the median to 36 percent. President Biden, the OECD, and many others want to raise the minimum wage (in stages) to $15 an hour. There is no consensus among economists on the likely effect on employment of this rise in the minimum wage. The figures illustrate two views. Figure 1 illustrates a market for low-skilled labor in which the demand for labor is Do and the supply of labor is S. The equilibrium wage rate is $4.75 an hour and 1.15 million workers have jobs. A minimum wage rate is set $7.25 an hour. The minimum wage rate exceeds the equilibrium wage and employment decreases to 1.1 million and unemployment increases, as the double-headed arrow shows. Raising the minimum wage rate to $15 an hour decreases employment to 0.95 million, the quantity of labor demanded at that wage rate, and increases unemployment. Figure 2 illustrates the labor market outcome that sup- porters of a $15 an hour minimum wage rate believe will occur. Confonted with the higher minimum wage rate, employ- ers have two choices. One choice is to lay off some workers, decrease produc- tion, and make a smaller profit. The other choice is to figure out ways of making the workers it hires more productive so that it becomes prof- itable to hire them at the new minimum wage rate. If workers become more productive, the demand for labor increases and the demand curve shifts rightward from Do to D. In Fig. 2, the demand curve shifts rightward by an amount that maintains the quantity of labor employed before the rise in the minimum wage. Demand for labor might increase by less or more than this amount. Even if the minimum wage rise does not lower employ- ment, it does increase unemployment because at the higher wage rate, more people are willing to work and want a job.