Question

News Analysis: Should the Minimum Wage Increase? Attempts: Do No Harm: /1 2. The connection between macroeconomics and microeconomics While economists measure unemployment at the macroeconomic level, microeconomic forces are often responsible for this macro aggregate. In other words, the tie between microeconomics and macroeconomics is inevitable when discussing the level of unemployment in an economy. Suppose the following graph represents the market for unskilled labor in a fictional economy. These workers typically represent the young, inexperienced, or uneducated part of the labor force and are therefore most effected by changes in the unemployment rate. Use the graph input tool to help you answer the following questions. You will not be graded on any changes you make to this graph. Note: Once you enter a value in a white field, the graph and any corresponding amounts in each grey field will change accordingly. Graph Input Tool Labor Market Labor Supply $8.7 420 Labor Supplied (Thousands of workers) 580 Wage Rate (Dollars per hour) Labor Demanded (Thousands of workers) Surplus Labor (Thousands of workers) WAGE (Dollars per hour) 160 Labor Demand Labor Demand Shifters Tax Credit (Dollars per hour) 0 000 200 400 000 000 QUANTITY (Thousands of workers) Suppose the minimum wage in this economy is $8.70 per hour. An unemployed worker is defined as someone who is willing to work at the prevailing wage but is unable to find employment. Because the minimum wage lies above the equilibrium wage, it is binding, which means it is also the prevailing wage.

Answer 1

(1) When wage = 8.7,

Labor demanded (Ld) = 420

Labor supplied (Ls) = 580

Size of labor force is 420 (= Ld) and unemployment is 160 (= Ls - Ld = 580 - 420).

(2) Labor force (LF) = Number employed + Number unemployed = 420 + 160 = 580

Unemployment rate = (Ls - Ld) / LF = 160 / 580 = 0.2759 = 27.59%

(3) True

The tax credit will increase labor demand at the minimum wage, reducing unemployment.