Problem: In 1996 Congress raised the minimum wage from $4.25 to $5.15 per hour. Some people suggested that a government subsidy could help employers finance the higher wage. This exercise examines the economics of a minimum wage and wage subsidies IN A MAKE-BELIEVE COUNTRY.
Suppose the supply of low skilled labor is given by LABOR SUPPLY = 10*w millions where w is the wage rate [in dollars per hour]. The demand for labor is given by LABOR DEMAND = 80 - 10*w millions.
1) What will be the free market wage rate and employment level?
2) Suppose the government sets a $5.00 per hour minimum wage. What will be the employment level?
3) Suppose the government pays a subsidy of $1 per hour directly to the employee. What will be the market wage and employment level? How much will the government pay per week [suppose every laborer works 40 hours].