Multiple Choice
If the unemployment rate is 9 percent and the natural rate of unemployment is 5 percent, then the cyclical unemployment rate is:
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11. Unemployment and Inflation
Unemployment: Minimum Wage Laws and Efficiency Wages
Multiple Choice
In a competitive labor market, why can imposing a binding minimum wage (set above the equilibrium wage) lead to unemployment?
A
A minimum wage increases the marginal product of labor, so firms hire fewer workers because each worker produces more output.
B
At the higher mandated wage, the quantity of labor demanded exceeds the quantity of labor supplied, creating a shortage of workers.
C
A minimum wage eliminates all wage differences across workers, so firms cannot distinguish productivity and must lay off workers at random.
D
At the higher mandated wage, the quantity of labor supplied exceeds the quantity of labor demanded, creating a surplus of workers.
Verified step by step guidance1
Step 1: Understand the concept of equilibrium wage in a competitive labor market, where the quantity of labor demanded by firms equals the quantity of labor supplied by workers.
Step 2: Recognize that a binding minimum wage is set above this equilibrium wage, meaning the wage floor is higher than what the market would naturally set.
Step 3: Analyze the effects of this higher wage: since workers are paid more, more individuals are willing to work, increasing the quantity of labor supplied.
Step 4: At the same time, firms face higher labor costs, so they reduce the number of workers they want to hire, decreasing the quantity of labor demanded.
Step 5: Conclude that because the quantity of labor supplied exceeds the quantity of labor demanded at the imposed minimum wage, a surplus of labor (unemployment) occurs.
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