Question

The market equilibrium wage is currently \(\$ 12\) per hour among hairdressers. At that wage, 17,323 hairdressers are currently employed in the state. The state legislature then scts a minimum wage of \(\$ 11.50\) per hour for hairdresscrs. If there are no changes to cither the demand or supply for hairdressers when that minimum wage is imposed, the number of hairdressers employed in the state will be: a. Fewer than 17,323 b. Still 17,323 c. More than 17,323 d. This is a bilateral monopsony so you can't tell.

Short answer

The number of hairdressers will remain at 17,323 (option b).

Step-by-step solution

Understand Market Equilibrium Wage

The current market equilibrium wage for hairdressers is $12 per hour. At this wage, the demand for hairdressers equals the supply, which means 17,323 hairdressers are employed at this salary.

Analyze Minimum Wage

The state legislature sets a minimum wage of $11.50, which is below the current equilibrium wage of $12. A minimum wage below equilibrium wage typically does not affect the market because employers are already paying more than the minimum required by law.

Consider Impact on Employment

Since the minimum wage of $11.50 is below the equilibrium wage of $12, it will have no impact on the employment level. Firms will continue to operate at the market equilibrium conditions because there is no economic incentive to lower wages to $11.50 when the equilibrium wage is already $12.

Conclusion on Employment

Based on the analysis, the imposition of a minimum wage of $11.50, which is below the equilibrium wage, does not affect employment. Thus, the number of hairdressers employed remains at 17,323.

Key concepts

Minimum Wage

Minimum wage is the lowest legal wage that a worker can be paid for their labor. Government bodies often set these wages to protect workers from exploitation and to ensure a basic standard of living. In the context of the labor market, the minimum wage acts as a price floor. It is crucial to understand that a minimum wage set below the market equilibrium wage, where supply meets demand, does not disturb the existing labor conditions. For hairdressers, with a current equilibrium wage of $12 per hour, a minimum wage set at $11.50 does not affect the hiring scenario as employers are already paying above this legal minimum.
When a minimum wage is above the equilibrium wage, it can lead to unemployment as employers may hire fewer workers at the higher cost. Conversely, setting it below the equilibrium wage, as seen here, maintains the status quo as the market continues to efficiently allocate labor resources without interference.

Labor Market

The labor market is where employers (demand for labor) and workers (supply of labor) come together. It operates similarly to other markets, governed by supply, demand, and equilibrium. In this case, hairdressers are the workers, and the businesses hiring them are the employers. The equilibrium wage, here at $12, ensures the balance of hairdresser supply with employer demand.
The state legislative decision to impose a minimum wage of $11.50 is an example of a government intervention in the labor market. Such interventions are designed to regulate employment terms, but in this particular scenario, since the minimum wage is below the $12 equilibrium, it does not disturb the labor market dynamics. Employers continue to hire at the equilibrium wage, ensuring 17,323 hairdressers remain employed.

Employment Impact

Changes in wage policy often aim to impact employment levels. However, not all wage changes trigger shifts in employment. When the minimum wage is below the market equilibrium, as it is for the hairdressers at $11.50 compared to the $12 equilibrium, there is no "binding" effect; thus, employment levels remain unchanged. This situation occurs because employers are already compensating at a higher rate than the legally mandated minimum, and there is no financial incentive to change.
It is crucial to comprehend that for a wage policy to impact employment, it needs to influence the cost-benefit analysis of employers or the reservation price for employees. Since the minimum wage here does not adjust the existing market equilibrium or economic incentives, the employment level holds steady, and the labor market functions as before with 17,323 hairdressers employed.