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Question:Suppose that, for example in India, a minimum wage is instituted in the modern sector above the market-clearing wage, while the rural traditional wage is market-determined at a lower level than in the modern sector. Describe the impact of this policy on the rural labor force, urban unemployment, and the rural wage.
Minimum WageThe minimum wage is the fixed amount of wage that is fixed by the government so as to inhibit the falling of the wages below a specific point. The organizations are obligated to pay this amount to the labor.
Answer and Explanation:The imposition of minimum wage is higher in the modern sector as compared to the rural sector. Therefore, people from rural areas will migrate to the modern sector in order to obtain higher wages. The rural labor force will shrink as the labor supply is reduced since people have migrated. The traditional rural wage is determined by the market forces with a decrement in the labor supply; at the prevailing wages, the labor demand will exceed the labor supply; hence the rural wage will improve.
The minimum wage is higher than the market-clearing wage rate in the modern sector; subsequently, the labor supply will increase in the market. The minimum wage rate cannot be driven down, so there will be a surplus of labor in the modern sector. Therefore, there will be a surge in unemployment in the modern sector.
