1. Standard textbooks argue that a minimum wage is a price floor in the labor market. Using a graph of supply and demand, show the impact of the imposition of a minimum wage, indicating the presence of unemployment with the floor.

Excess of quantity supplied over quantity demanded at an above-market wage.

2. While the standard criticism of the minimum wage is the constraint imposed on the labor market, empirical studies provide no consensus on this argument. Many studies argue that unemployment may rise with increases in the minimum wage, but other investigations suggest that the opposite would be true. Why do you think that there is such a wide array of opinion and evidence regarding the minimum wage?

Not all else is held constant, and it’s very difficult to hold everything else constant. Job reductions could be offset by economic growth in the rest of the economy.

3. What underlying problem frustrates the effort to determine the impact of the minimum wage on employment? Explain carefully, using economic reasoning.

It is necessary to compare the economy with the minimum wage (or with the increase) to the economy in the absence of the minimum wage (or absent the increase). One is an actual value, the other is a hypothetical scenario, and can only be described with an estimate based on assumptions that may or may not hold.

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