Question

The market equilibrium wage is currently 12 dollars per hour among hairdressers. At that wage, 17,323 hairdressers are currently employed in the state. The state legislature then sets a minimum wage of 11.50 dollars per hour for hairdressers. If there are no changes to either 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

b. Still 17,323

Step-by-step solution

Understand Market Equilibrium and Minimum Wage

In a competitive market, the equilibrium wage is where the supply of labor equals the demand for labor. A minimum wage is a legal floor on the wage rate. When a minimum wage is set below the equilibrium wage, it typically does not affect the market, as the equilibrium wage will naturally prevail.

Analyze the Given Information

The equilibrium wage in this market is $12 per hour, with 17,323 hairdressers employed. A minimum wage of $11.50 is set, which is below the market equilibrium wage of $12.

Evaluate Effects of the Minimum Wage

Since the minimum wage of $11.50 is below the equilibrium wage of $12, the market wage remains at $12. This is because the minimum wage does not interfere with the natural market outcome.

Conclude Employment Scenario

Because the minimum wage is below the market equilibrium and does not alter the wage rate, the number of hairdressers employed remains at the equilibrium level of 17,323.

Key concepts

Minimum Wage

A minimum wage is a legally enforceable lowest hourly pay rate that employers can pay their workers. This wage floor is intended to ensure a basic living standard for employees. When we consider how the minimum wage interacts with the market, it is crucial to understand where it stands in relation to the natural market equilibrium.
If a minimum wage is set below the market equilibrium, it usually does not have an impact because employers are already paying above this floor due to market dynamics. The primary goal of minimum wage laws is to protect workers from unfairly low pay, but when set below the equilibrium market rate, they do not alter any current employment conditions. In essence, in such situations, the market wages tend to follow the equilibrium rate, and the minimum wage acts more as a safety net than as a disruptor.

Labor Market

The labor market is the mechanism by which workers find paying work, and employers find willing workers. It is characterized by two main forces: the supply of labor, which reflects the number of people willing to work at various wage levels, and the demand for labor, which is the number of jobs or hours that employers are willing to pay for at those wage levels.

• Supply of Labor: This is influenced by factors such as population size, work preferences, and alternative opportunities for workers.
• Demand for Labor: This depends on the needs of businesses, technological advancements, and overall economic conditions.

In a perfectly competitive labor market, the wage rate is determined by the balance of these two forces. Therefore, the intersection point of the labor supply and demand curves dictates the market equilibrium wage, which is the wage rate that stabilizes the labor market. Changes in demand or supply can shift these curves, thus affecting the equilibrium.

Employment Level

Employment level in any market refers to the total number of individuals currently employed at the prevalent wage rate. In a free market, this level is typically stable when the labor market is at equilibrium. Here, the number of job seekers matches the number of jobs available.
As conditions in the market evolve, factors like economic growth, labor laws, and technological changes can alter both employment demand and supply. In situations where wages are set at or above the market equilibrium, employment levels may fluctuate noticeably.
However, when a minimum wage is set below the equilibrium wage as in our scenario, the employment level remains unaffected at the equilibrium number. This is because market forces naturally maintain employment at a rate where the demand for workers meets the supply, keeping both employment and market stability intact. Hence, the number of individuals employed stays constant unless external factors significantly alter the supply or demand conditions.