A binding minimum wage established by the government
A)is essentially a price ceiling that creates a shortage of workers.
B)will be effective only if the minimum wage is set below the free-market equilibrium wage.
C)will have no effect on the quantity of labour employed.
D)will affect adversely only those workers whose value of productivity is greater than this minimum wage.
E)is a price floor that will create a surplus of workers if the labour market is competitive.

Question

Quizplus · Accepted Answer

A binding minimum wage established by the government is a price floor that sets a wage rate above the equilibrium market wage. In a competitive market, this will create a surplus of workers who are willing to work at the minimum wage, but employers will demand fewer workers, resulting in unemployment or underemployment. Therefore, the correct choice is E.

A Binding Minimum Wage Established by the Government