Labor Economics



Excessdemand causes the demand curve AC to shift towards the right. Theinitial equilibrium point of supply and demand for labor shiftstowards the right. The new equilibrium is associated with a high wagerate and more labor. An equal increase in the supply of labor shiftsthe two curves towards the right. As a result, there is a shift inthe equilibrium point towards the right. The new equilibrium point isassociated with a higher wage rate as well as a higher labor ratetherefore, there is more employment due to the higher demand forlabor. Besides, the price of labor will increase since businesseswill be required to increase the wage rate to attract morelabor(Laing, 2011).&nbsp

Indemand curve 1, an increase in the minimum wage rate from $ 10 to $15 corresponds to a decline of labor from 12 to 5. The amount oflabor declines with 7 (12-5) for an increase of $5 in the minimumwage. The changes indicate that the decrease in labor (7) is morethan the increase in the minimum wages $5. The increase in theminimum wage results to a decline in the number of employed personsas an indication of the sensitivity of labor(Laing, 2011).&nbsp

Incontrast, in the demand curve 2, a change in the wage rate from $10to $ 15 corresponds to a decline in labor from 12 to 10. The changein the wage rate ($5) results in a smaller decline in labor by 2. Theabove analysis indicates that demand curve 1 is more wage elasticcompared to demand curve 1. The change in the wage rate causes agreater decline in labor in demand curve 1 compared to demand curve2(Laing, 2011).

Increasingwage inelasticity favors an increase in the minimum wage rate sincethe wage rate causes a lesser effect on the employment levels in theeconomy. In cases where the demand for labor is elastic, an increasein the wage rate results into a more than equal decrease in thedemand for labor. In such a case, increasing the minimum wage rate isexpected to result in more people being unemployed and thus increasepoverty levels (Laing, 2011).&nbsp

Ingraph 3, firm 1 is a price taker since the supply of labor isperfectly inelastic. The supply of labor is fixed at $15, and thefirm has to adjust the number of labor units it needs for optimumproduction at the set price. Below the price of $15, there is nosupply of labor (Laing, 2011).&nbsp

Incontrast, Firm 2 is a price maker since the supply of labor iselastic. Firm 2 is a monopsonist while firm 1 is the competitive firmin the labor market. The key difference between the two firms is thatfirm2 has the advantage in determining the most appropriate price forlabor to attain optimum production levels (Laing, 2011).&nbsp

LineAD represents the marginal expense line for the competitive firm. Theline KM represents the marginal expense curve for the monopsonist whocannot discriminate at all in the wages paid to identical workers(Laing, 2011).&nbsp

Theprofit-maximizing rule that holds for both the competitive andmonopsonist firms is choosing the employment level that equates themarginal revenue product to the marginal cost (Laing, 2011).&nbsp

Therule maximizes the profits of the firm since point G is theintersection of the marginal revenue product and the marginal cost oflabor. The point represents the first order condition for maximumprofits. The profit maximizing level of labor is determined at 100 onthe horizontal axis. The corresponding wage rate -$10 is obtainedfrom the supply curve J (Laing, 2011).&nbsp

Theprofit maximization level of employment and wage rate for amonopsonist who can perfectly discriminate between identical workersis 150 and $15 respectively (Laing, 2011).&nbsp

Theprofit maximization level for a monopsonist who cannot discriminateat all between identical workers is at point G the labor level is100 while the wage level is $20. The non-discriminating monopsonisthires where the marginal cost of hiring another worker (MC) is equalto the revenue generated by hiring that worker (Laing, 2011).&nbsp

Ingraph 3, the initial equilibrium of employment in wages for themonopsonist who cannot discriminate is set at $ 10. The monopsonisthires the first worker at the wage it requires to get him to enterthe labor market. Consecutive workers are hired at a higher wage upto the point where the demand and supply curves for labor intersect(Laing, 2011).&nbsp

Asa union leader, I would advocate for the monopsonist who cannotdiscriminate to raise the minimum wage from the initial $ 10 to $15.The minimum wage maximizes the total wages paid. I would require thenondiscrimination monopsonist to reduce their wage rate from $ 20 to$ 15. The wage rate is effective since it increases the wage levelfrom 100 to 150 (Laing, 2011).&nbsp

Raisingthe minimum wage only increases the level of unemployment sinceemployers are unwilling to pay higher wages to young andinexperienced workers. Employers find the minimum wage as expensivecompared to the production capacity of the employees and are forcednot to employ more people.

Second,increasing the minimum wage causes cost push inflation. An increasein the wage rate results in an increase in the prices of goods thatfurther affects the buying capacity of the workers (Laing, 2011).&nbsp

Agood thing happens to employees when the wage elasticity of demand isinelastic. There is increased employment since firms do not laypeople off due to the increase in the cost of labor instead, theyacquire more employees to maintain their level of production. The badthing to employees is the inability for wages to increase in the longrun (Laing, 2011).&nbsp

Accordingto graph 3, raising the minimum wage from the original equilibrium atpoint H will result in more employment beyond the level of 150(Laing, 2011).&nbsp

Accordingto graph number 4, an increase in the minimum wage rate increases thepurchasing power of consumers. Subsequently, there is an increaseddemand for products that causes the demand for labor to shift from D1to D2. Therefore, the demand for labor increases from 100 to 150 (Laing, 2011).&nbsp

Thefour arguments differ regarding wage elasticity. The first argumentassumes an elastic wage demand for labor. It argues against theincrease in the minimum wage rate due to the resultant unemploymentlevels (Laing, 2011).&nbsp

Thesecond argument against an increase in minimum wage is due tocost-push inflation. It emphasizes that an increase would cause theprices of goods to rise (Laing, 2011).&nbsp

Ifeel that the minimum wage should be increased based on theelasticity of demand faced by a given industry since the elasticityof demand varies from one industry to another. As such, minimum wageshould be raised in industries that face an inelastic demand forlabor. Such industries can accommodate more workers at high wagerates. An increase in the wage rate increases the employmentlevels(Laing, 2011).&nbsp

Incontrast, increasing the wage rate causes an increase in theunemployment levels for industries with elastic demand. It furtherimpacts negatively on the economy by increasing the poverty levels(Laing, 2011).&nbsp


Laing, D.(2011).&nbspLaboreconomics: Introduction to classic and the new labor economics.NewYork: W.W. Norton.