Group+1+Price+Controls

=Week 2: Price Controls= = Assume that the demand and supply for labor in the construction industry are defined by the following equations: =

L S = 2 + ½ w  L D = 10 - ¼ w


 * a. Provide a graph of the labor market, making sure to label key points.**

__JIMMY BOWENS__

The equation L S = 2 + ½ w suggests that the Labor Supply Curve intersects the vertical axis ( Wage - Price per Labor at every quantity demanded) at 2, and that the slope 1/2. The slope is positive, as are most supply curves. To interpret this we need to look at the relationship between wage and the labor demanded. As the wages increase, more and more (construction workers) people are willing to supply their labor. Alternatively, if the employer reduces wages, then less people are willing to supply their labor.

On the other hand, the equation L D = 10 - ¼ w represents the labor demanded at each wage value. The Labor Demand Curve intersects the vertical axis (Wage), and has a slope of -1/4. This suggests that the rate of change along the Labor Demand Curve is 1/4 and remains constant because it is a linear equation. The graph of this equation suggests that as Wages increase, the quantity of labor demanded at every wage value will also decrease because employers want to produce their goods or services using little as possible cost inputs. Wage is a cost input because employers have to pay workers wages for their labor in order to get produce their products. On the other hand, if wages decrease, the quantity of labor demanded will increase because the cost input of hiring more workers will be minimal because wages are low.

The graph below illustrates the aforementioned points.




 * b. What is the equilibrium wage rate and quantity of labor in the market?**

__WES GIFFORD__

The equilibrium wage rate and quantity of labor will be equal to the intersection of the two lines on the above graph, given the stated conditions. To find that point, we must first set the two equations equal to each other, to find out at which point on the X axis the Labor Demanded will intersect the Labor Supply. When LD = LS, we have the equation 10 - .25w = 2 + .5w. Solving for W (wage) shows that the two points will have the same value on the X axis when W = 10 2/3. We can then plug that value into the equations for the Supply curve and Demand curve, respectively. When we solve with 10 2/3 in place of W, both equations yield that at 10 2/3 on the X axis, they are at the point 7 1/3 on the Y axis. The intersection of these two lines, therefore, occurs at point (10 2/3, 7 1/3).

This means that equilibrium wage will be 7 1/3 dollars per hour (or similar unit, as this was unspecified in the prompt). It also means that the equilibrium labor quantity at that wage, both the supply and demand for labor, will be 10 2/3 million workers (or similar unit).

__AMER JUNTADO__

The equilibrium wage rate and quantity of labor can be found where the two curves on the graph intersect, meaning that both sides balance each other. We can also find the equilibrium through basic algebra by assuming that Labor Wage is equal to Labor Demand, or Ls=Ld. Given the equations Ls=2+ 1/2w and Ld= 10-1/4w, here w equals wages. To find where Ls and L­d are equal, we must find W. The first step is to substitute the values in Ls=L­d: 2 + 1/2w= 10 – 1/4w 3/4w=8 w=10 2/3 In all responses both Ls and Ld=7.33333= In this case, the wages offered (supply) and wages demanded by labor (demand) are equal. Thus this is the equilibrium wage.


 * c. (PART ONE) Assume that the government sets a minimum wage of $12.00 in the construction industry to compensate workers for unsafe conditions.What is the effect of the labor market (i.e. what is the new equilibrium wage and quantity of labor)?**

__JIMMY BOWENS__

A minimum wage instituted by the government can have very different effects depending on the price it is set to. For instance, a minimum wage set above the market equilibrium price creates a surplus in the form of unemployment. Because this wage is set above the market price, it is considered a binding minimum wage, and prevents the market from moving back to equilibrium. On the other hand, a minimum wage set below the market price creates a shortage of labour. A minimum wage set below the market price is considered not binding, and the market can achieve equilibrium by increasing wages.

For the example above, a minimum wage of $12.00 is considered a binding minimum wage because it is set above the market wage of approximately $7.00. Because of this, the market cannot achieve equilibrium, and a surplus in the form of unemployment is generated. The graph below shows that a $12.00 minimum wage will cause employers to hire less construction workers because the demand for labour will decrease, while the supply of labor will increase.




 * c. (PART TWO) Who benefits from the policy and who loses?**

__WES GIFFORD__

In this situation, those who are able to find work will benefit from increased wages and a higher standard of living. However, a minimum wage set above equilibrium levels will result in unemployment, so those who are unable to find work would definitely lose from this policy. This policy could also harm smaller businesses, who may not be able to afford enough staff to keep their business running if they are required to pay increased wages.

It is important to remember that both the winners and losers in this situation are only one segment of the available work force - usually entry-level, young, or unskilled workers. Skilled and experienced laborers are likely to make more than the minimum wage anyway.

__JIMMY BOWENS__

The points that have been raised by Wes above are completely true with respect to the imposition of a minimum wage. I would like to add some more to this.

We all recognize that it is imperative for governments to protect workers, especially unskilled workers and those in the service industry, from exploitation at the hands of merciless employers. However, when governments set price floors on wages, this in turn causes inadvertent problems. For instance, in a market economy where what is produced is governed by the preferences of consumers hence achieving market equilibrium, setting a price floor on wages prevents the labor market from achieving equilibrium if it is set above the market price. When this happens, employers have no choice but to take drastic actions, the first of which is to decrease the amount of labour demanded.

However, in light of globalization, the issue of 'outsourcing' has emerged as a corrective measure to address the issue of price floors on wages. When employers and large corporations are forced to pay higher wages, especially above the market price, they move overseas where the labour markets are less regulated. This results in the loss of jobs to foreigners, as they are willing to accept fewer wages for the same amount of labour hours in the United States.

Moreover, if firms can move overseas where they can produce the same quantity using the same supply of labour for less wages compared to in the United States, it means they will have a comparative advantage in producing their products in these less developed countries because the opportunity costs (wages) are less than when the produce in the United States.

So, the issue of price floors on wages is very much a contentious topic. We want to believe that we are helping workers by imposing a minimum wage, but sadly, it creates more problems, and it gives producers an incentive to leave they market or move overseas where they can escape such pressure.