Documented Problem Solving: The Impact of a Minimum Wage

Students will:

• recognize labor demand and labor supply;
• describe how the equilibrium wage rate is determined;
• analyze the impact of a minimum wage on the labor market.

This exercise is primarily focused on Principles of Economics course, but it could be used as a review for an advanced Microeconomics course or a Labor Market course. In order to benefit from this activity, students need to understand how labor demand and labor supply determine the equilibrium wage rate. Students can then build on that understanding to determine the impact of a minimum wage.

For this exercise, all that is needed is a MC, T/F or short answer question that involves analytical thinking skills. One example is given below.

Assume that the equilibrium wage is $5.50 per hour. Ceteribus paribus, if a minimum wage is set at $6.50, the quantity of labor demanded will _______ and the quantity of labor supplied will _______.

(a) increase; increase.

(b) increase; decrease.

(c) decrease; decrease.

(d) decrease; increase.

answer: d

Students will have a much better chance of arriving at the correct answer if they use a graph of the labor market to help them determine the outcome. In addition, some students are confused about which entity demands labor. Because consumers demand goods and services in the product market, they have a hard time remembering that businesses demand labor in the labor market.

Students are asked to write a documented problem solution for the above question. Be sure to focus on the thought process that students use to determine the answer rather than just the answer itself. Below is an example of one appropriate answer including all the steps that students should use.

• First, I looked at my notes to review the labor demand and labor supply curves.
• Based on the lecture, I know that the intersection of the two curves determines the equilibrium wage rate and the equilibrium quantity of labor.
• This question says that the equilibrium wage rate is $5.50.
• The book says that a minimum wage is a lower limit on the wage rate. It is a price floor.
• This question says that the minimum wage rate is $6.50.
• At a higher price (the minimum wage) businesses will hire (or demand) fewer workers because each worker costs more than the equilibrium price.
• At a higher price (the minimum wage) more workers will want to work (or supply labor) than at the equilibrium price.
• So, the quantity of labor demanded will decrease and the quantity of labor supplied will increase.

Angelo, T.A. and Cross, K.P. (1993). Classroom Assessment Techniques: A Handbook for College Teachers. San Francisco: Jossey-Bass.