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

a. Suppose the minimum wage is above the equilibrium wage in the market for unskilled labour. Using a supply and demand diagram of the market for unskilled labour, show the market wage, the number of workers who are employed and the number of workers who are unemployed. Also show the total wage payments to unskilled workers.

b. Now suppose the minister for employment proposes an increase in the minimum wage. What effect would this increase have on employment? Does the change in employment depend on the elasticity of demand, the elasticity of supply, both elasticities, or neither?

c. What effect would this increase in the minimum wage have on unemployment? Does the change in unemployment depend on the elasticity of demand, the elasticity of supply, both elasticities, or neither?

d. If the demand for unskilled labour were inelastic, would the proposed increase in the minimum wage raise or lower total wage payments to unskilled workers?

Would your answer change if the demand for unskilled labour were elastic?