Elasticity of Labor Demand - Essay Example

Firm A will likely be unionized as compared to Firm B. This is because compared to firm B firm A offers non-competitive pay and benefits. Non-competitive pay or wages is one of the reasons why most employees go for unions with the hope it leads to a pay rise. 

Question Four.

Labor supply (ES) =10 + w

Labor Demand (ED) = 40-4w

   (4a). what is the equilibrium wage and employment if the labor market is competitive?      

At equilibrium ES = ED  

Therefore, 10 +w = 40- 4w

Collecting like terms,         w +4w = 40 – 10

5w = 30

W = 6

Equilibrium employment = 10 + w’

10 + 6

E’= 16

(4b). Why do we say the competitive equilibrium is an efficient allocation of resources?

Competitive equilibrium is said to be the efficient allocation of resources since it is the point at which it is not possible to make any worker a better offer without making another worse off.

(4c). at an equilibrium price of $ 6 the amount of employment is 16. Suppose the government set a minimum price at 7, more workers will be induced to look for jobs. This will increase labor supply at the same time reducing demand for labor

At $ 7 labour supply = 10 + w”

= 10 + 7

=17

Labour demand = 40 – 4w”

= 40 – 28

= 12

Number of people who would be looking for a job = 17 – 12

5.

Unemployment rate = (E’ –E)/E x 100%

= (17- 16)/16 x 100%

= 6. 25%.

Question Five

Setting a minimum wage in a two-sector economy has a spillover effect in the two economies. For example, in a model where one sector is more productive than the other, setting a minimum wage in the unproductive sector to reduce the wage gap causes a negative spillover effect on the productive sector. As much as job creation in the unproductive sector is ambiguous, job creation in the productive sector unambiguously decreases. This is because a minimum wage increases the outside option of unemployed workers contributing to wage determination in the productive sector.

Question Six

• The current law in the US in terms of payroll tax levied on firms and workers provides that the maximum amount of taxable earnings is $ 117, 000
• Empirical estimates of labor supply and labor demand are the rate of change in employment and the rate of change in wages
• An increased payroll tax will mostly burden the workers. This burden can however be transferred to the firms through tax shifting. This way employing firm can help the employee carry the burden of the increased payroll tax

Question Seven

As seen from the graph, if the worker evaluation of the compensation is less than the cost of providing it, the amount of labor supply will reduce in the market. This is represented by a downward shift in the supply curve resulting in an increase in wages and a decrease in employment.