【Fiscal policy】If a minimum wage is instituted in the urban modern sector...
If a minimum wage is instituted in the urban modern sector above the market clearing wage, while...
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Question:If a minimum wage is instituted in the urban modern sector above the market clearing wage, while the rural traditional wage is market determined at a lower level than in the urban modern sector.a) What is the impact of this policy on the rural labor force, urban unemployment, and the rural wage?b) Will the modern sector wage be equal to the traditional sector wage after labor markets reach equilibrium through migration? Explain.c) What effect might increased housing costs in urban areas have on the equilibrium you described in part (b)?d) What effect might the introduction of factories in rural areas have on the equilibrium you described in part (b)?
Minimum Wage Laws:Almost all economists would argue that a binding minimum wage, that being a minimum wage over the market wage, decreases employment. The minimum wage hurts the lowest skilled workers the most by putting a barrier to entry in the labor market. The workers in the middle are better protected though and their wages might rise.
Answer and Explanation:A.A binding minimum wage would reduce the level of employment for urban workers. Rural workers though will see wages rise and employment increase as businesses seek to shift labor demands elsewhere.B. The two wages will only be the same if other factors such as transportation and work space costs and such are equal. If shifting labor to rural areas for production only to pay to ship it back to the city occurs, then wages will reflect the increase in cost of doing so.C. If housing costs rise, it is likely so will labor costs. This happens for two reasons, first office/work space will likely become more expensive and thus you only keep the highest skilled workers. Second, your workers are seeking higher wages.D. Factories will increase the productivity of rural workers thus increasing their wages. This means that urban worker wages and employment will likely decline as they have to compete with higher skilled labor.
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