Chapter 4

Wage Determination , the Allocation of

Labor and Alternative Pay Schemes in
Labor Market
 4.1 Definition of Wages:

Definition of Wages:.
 According to J. R. Urner “A wage is a
price, it is the price paid by the
employer to the worker on account of
labor performed”.
 “It is also the price paid by an
entrepreneur to the worker, employed
for productive purposes”.
 The workers and the unions stress
wages as income.
 Types of Wages:

1. Nominal Wages: Nominal wages also known as

money wage is the amount of money received by
the laborers
2. Real wage: The goods and services that are
given to the worker in addition to his money
wage. It is also the wage that is gained in the
form of goods and services with the money wage
(purchasing power). Real Wage= Nominal wage /
Prices = W/P
3. Equilibrium wage: the wage at which the
quantity of labor supplied in a time period equal
the quantity of labor demanded
4. legal minimum wage
 fixed by the government basing on the
economic conditions of the economy.
 Both the parties (Labor and industrialists)
must oblige it.
 In the year 1789, the British government
appointed a committee to fix the minimum wage.
In the year 1928, the Indian government
constituted a committee to fix a minimum wage.
 In USA, the minimum wage was fixed at 0.25
dollars in 1938. At present it is 5. 25 dollars
per hour.
 4.2 Theories of Wages
 The development of wage theories may be
broadly classified into four stages.
I.The middle age theories
II.The classical theories of wages
III.Neoclassical Theories
IV.Other factors in determining the wage
( Modern Theory)
 I.The middle age theories:
 Just to maintain his family and himself according
to their established position of the
communities”.
 It was a wage concept rather than a theory for
wages.
II. The classical theories of wages: classical
economists forwarded different theories of
wage. These are
a. Adam Smith’s ‘theory of wage’
b. The Ricardo’s theory of subsistence wage
c. The standard of living theory
d. The wage fund theory e. Residual Claimant
Theory
 A. Adam Smith’s ‘theory of wage
 Adam Smith consider the labor as commodity

So that for him labor is not going to use it for

himself. He can change it for commodities. Labor
therefore, is a real measure of exchangeable
value of all commodities.
 He defined the minimum wage “labor of the
husband and wife together must be able to earn
something more than what is precisely necessary
for their own maintenance”.
 B.The Ricardo’s theory of subsistence wage
 This theory was first formulated by
Physiocrats
 According to this theory, wages tend to
settle at the level just sufficient to maintain
the worker and his family at minimum
subsistence
 If the wages rise above this level, the
workers are encouraged marrying and having
larger families and vice versa.
 Therefore, Theory is called the bronze law
of wages or Iron law of wages.
 c. The standard of living theory

 This is the modified from of subsistence theory of

wages, developed in 19th century
 According to this theory workers will not accept the
wage which provides below their established
standard of living.
D. The wage fund theory:
 This theory is associated with the name of J.S.Mill.

 According to him wages depend upon the

relationship between the supply of Labor (
 Cont.…

population), the capital and wage fund available to

employ the labor
But this theory taken the wage fund as fixed. By this
wage could rise only by the reduction in the number of
workers.
 E. Residual Claimant Theory:

 This theory has been advanced by the

American economist, Walker
 product of industry is to be divided in to four
parts: rent, interest, profit and wage.
 Laborers are paid what is left after making
payments to other factors
 2.Neo classical theories of wages:
 Neoclassical economists developed different
theories regarding to wage determination
A. The marginal productivity theory of wages
B. Demand and supply theory of wage
determination
A.The marginal productivity theory of wages:
 Prof. J.B . Clark developed it.
 price of the labor is decided by its marginal
productivity.
Assumptions:
o This theory works in perfect competition to
both the product and labor markets.
 Cont. …
o There is perfect mobility of labor from one
employment to another and
o Labor is homogeneous
B .Demand &supply theory of wage determination:
 wages are largely determined by the supply
of and demand for labor
3.Other factors in determining the wage
 In modern economies, wages are generally
fixed by these factors. These are:
A. Individual bargaining: In this each worker
bargains separately with his employers.
B. Collective bargaining: In this both
Wages are determined by the collective
actions of trade unions and employers
representative.
c. Authorities: government to determine
the wages of the labor establishes
authorities or statutory bodies. They are
wage boards, Industrial tribunals or
compulsory arbitration. In fixing the
wage rates these bodies consider the
equity, public policy, social and political
climate, and economic conditions.
 Perfectly Competitive Labor Market

o Perfectly competitive labor markets have

the following characteristics:
●
Large number of firms trying to hire an
identical type of labor
●
Numerous qualified people independently
offering their services
●
Neither firms nor workers have control over
the market wage
●
Perfect, costless information and labor
mobility
 Market Labor Supply
• Though individuals have
backward-bending labor supply

Wage rate
curves, market supply curves S
are usually positively sloped
over normal wage ranges.

• High relative wages attract

workers away from household
production, leisure, or their
previous jobs.
• The height of the market
supply curve measures the
opportunity cost of using the
marginal labor hour in this
employment.
• The shorter the time period,
the less elastic is the labor Quantity of
supply curve. Labor Hours
 Wage and Employment Determination

Wage rate
S
• The equilibrium wage rate W0
and level of employment Q0 Wes
occur at the intersection of labor
supply and demand.
W0
• An excess demand of Q2- Q1
would occur at a wage rate of Wed
Wed.
D
• An excess supply of Q2- Q1
would occur at a wage rate of
Wes.

Q1 Q0 Q2 Quantity of
Labor
Hours
 Labor Supply Determinants

●
Other wage rates
●
If wages in other occupations rise (fall), then
labor supply will fall (rise).
●
Nonwage income
●
If nonwage income rises (falls), then labor
supply will fall (rise).
●
Preferences for work versus leisure
●
If preferences for work increase (decrease),
then labor supply will increase (decrease).
 Labor Supply Determinants

●
Nonwage aspects of job
●
If the nonwage aspects of a job improve
(worsen), then labor supply will increase
(decrease).
●
Number of qualified suppliers
●
An increase (decrease) in the number of
qualified workers will increase (decrease)
labor supply.
 Labor Demand Determinants
●
Product demand
●
Changes in product demand that
increase (decrease) the product price,
will increase (decrease) labor demand.
●
Productivity
●
An increase (decrease) in productivity
will increase (decrease) labor demand,
assuming that it does not cause an offset
in the product price.
 Labor Demand Determinants

●
Prices of other resources
●
For gross substitutes, an increase
(decrease) in the price of a substitute
input will increase (decrease) labor
demand.
●
For gross complements, an increase
(decrease) in the price of a complement
input will decrease (increase) labor
demand.
 Labor Demand Determinants

●
Prices of other resources
●
For pure complements, an increase
(decrease) in the price of a complement
input will decrease (increase) labor
demand.
●
Number of employers
●
An increase (decrease) in the number of
employers will increase (decrease) labor
demand.
 Changes in Labor Demand

Wage rate
• Assume that the productivity S
of workers rises due to
computer innovations.
W1
• This will raise the marginal W0
product and thus shift the
labor demand curve to the
right (D0 to D1). D1
D0
• The equilibrium wage rate
will rise to W1 and equilibrium
quantity will rise to Q1.
Q 0 Q1 Quantity of
Labor Hours
 Changes in Labor Supply

Wage rate
S0
• Assume that the number of
working-age immigrants S1
increases substantially.

• This will shift the labor W0

supply curve to the right (S0 to W1
S1).

• The equilibrium wage rate D0

will fall to W1 and equilibrium
quantity will rise to Q1.

Q 0 Q1 Quantity of
Labor Hours
 Wage and Employment for a Perfectly
Competitive Firm

• A firm hiring in a perfectly Wage rate

competitive labor market is a
“wage taker.” Its labor supply
curve, SL=MWC=PL, is
perfectly elastic at W0.
W0 SL=MWC=PL
• A firm will hire another
worker if the additional
revenue the worker generates,
marginal revenue product
(MRP), is greater than the cost
of hiring an additional worker, DL=MRP=VMP
marginal wage cost (MWC).

• The firm maximizes its profits

by hiring Q0 units of labor Q0 Quantity of
(MRP=MWC). Labor Hours
 Allocative Efficiency
●
An efficient allocation of labor is
obtained when society gets the largest
possible amount of output from a
given amount of labor.
●
Efficient allocation requires the VMP
of labor for each product be equal to
the price of labor.
●
Perfect competition in the product and
labor markets creates allocative
efficiency.
labor market efficiency
●
An efficient allocation of labor is obtained
when society gets the largest possible
amount of output from a given amount of
labor.
●
Efficient allocation requires the VMP of
labor for each product be equal to the price
of labor or VmPAx= VmPAy=VmPAn =PLA
●
when VMP˃PL---under allocation labor
● VMP<PL----- over allocation of labor
● VMP= PL----- efficient allocation
● VMP= PL----- efficient allocation
●
Perfect competition in the product market
ensures that MRP=VMP ,and competition
in the labor market ensures that MWC
equals PL .
●
This satisfyies the condition for efficiency
in the allocation of type A labor.
VMPAx=VMPAy=VMPAn= pLA
2. Wage and Employment
Determination: Monopoly in
the Product Market
 Wage and Employment for a Monopolist

• Because a monopolist faces Wage rate

a downward sloping demand
curve, increased hiring of labor b
and the resulting larger output
force the firm to lower its price. c
W0 a SL=MWC=PL
• Because it must lower its
price on all units, its marginal
revenue (MR) is less than the
price.
DC=VMP (MP*P)
• The firm’s MRP curve (MP *
MR) lies below the VMP curve
(MP * P), and thus firm hires QM DM=MRP (MP*MR)
rather than QC.
QM QC Quantity of
• An efficiency loss of abc
results. Labor Hours
 3. Monopsony

●
A monopsony is a labor market where a
single firm is the sole hirer of a particular
type of labor.
●
A monopsonist has control over the wage rate
workers are paid by hiring more or less labor.
 Monopsony
• A monopsonist faces an upward sloping labor supply curve. It has to
pay a higher wage to get more workers.
• The total wage cost (TWC) to the firm is calculated as the number of
units of labor times the wage rate.
• The firm maximizes profits by hiring at MRP = MWC at 3 units.
• The marginal wage cost (MWC) is the additional cost of hiring the last
worker.

Units of (VMP)
Labor TWC MWC MRP
(L) Wage (3) (4) (5)
(2)
(1)
1 $1.00 1 1 $7
2 $2.00 $4 $ 3 $6
3 $3.00 $9 $ 5 $ 5
4 $4.00 $16 $ 7 $ 4
5 $5.00 $25 $ 9 $ 3
6 $6.00 $36 $11 $ 2
7 $7.00 $42 $6 $1
 Wage and Employment
for a Monopsonist
• The firm’s MWC lies above Wage rate MWC
the SL.
• The monopsonist equates its SL=PL
MRP with its MWC at point a
and hires QM units of labor. a
• To attract these workers, it
need only pay WM. WC c
• The firm thus pays a lower WM b
wage (WM rather than WC) and
hires fewer units of labor (QM
instead of QC) than firms in a DL=MRP=VMP
competitive labor market.
• An efficiency loss of abc Q M QC
results. Quantity of
Labor Hours
 5.Unions and Wage Determination

 unions can increase the wage rate paid to those

members who have jobs by

(1) Increasing the demand for labor

(2) Restricting the supply of labor, and

(3) Bargaining for an above equilibrium wage.

1. Increasing demand for labor
 Unions can increase demand for labor and
then wage rate through
(i) increase the product demand,
(ii) enhance labor productivity,
(iii) influence the price of related resources,
and
(iv) increase the number of buyers of its
specific labor services
2. Restricting labor supply
 Unions can restrict labor supply by taking
actions or supporting government policies
which alter one or more of the
determinants of labor supply.
I. reducing the number of qualified suppliers
II. influencing non wage income are of some
significance
3. Bargaining for above eqilibrium wage
 some unions are successful at enlisting as union
members a large number of workers in an
industry or occupation.
 Unions will only exert an influence on wage and
employment outcomes if they have sufficient
power to realize their objectives
 In this circumstance firms can only buy labor on
terms acceptable to the union. One measure of
control union’s exercise over labor supply is
union density, the proportion of the eligible labor
force who are union members.
 Bilateral Monopoly

Presence of strong trade unions and

monopsonistic employer in labor market leads to
indetermination of wage rate
 however if monopolistic has more negotiating
power, the wage rate and employment level
would be inclined to buyers interest. While if
monopoly has less power to negotiate the wage
rate and employment level would be inclined to
interest requested by sellers. Final wage will
depend on the relative bargaining strength and
powers of each party.
Fig; shows Bilateral monopoly
LS
MWC

Wu

Wc
Wm

DL=MRP=VMP

Q1 Qc
4. Wage Determination:
Delayed Supply
Responses
 Cobweb Model
• The market for highly trained
professionals such as nurses
has delayed supply responses Wage rate S
to changes in demand and
wage rates. W1
• Because the quantity of labor
supplied is temporarily fixed at W2
Q0, the wage rate rises to W1 W0
when demand changes from D0
to D1.
• At wage rate W1, Q1 nurses D1
are attracted to the profession.
• With supply fixed at Q1, the D0
wage rate falls to W2.
• With this wage rate, the
quantity of nurses falls over
time to Q2. Q0 Q2 Q1 Quantity of
• The cycle repeats until
equilibrium is achieved at the Labor Hours
intersection of S and D.
 Evidence

●
Some evidence exists for cobweb
adjustments in markets such as
lawyers and engineers.
●
Critics argue that:
●
Students make choices on the basis of
the lifetime earnings stream rather than
starting salaries.
●
Students make a forecast of the long-run
outcome of a change in demand or
supply and make the right choice.
Payment schemes:
Economics of Fringe
Benefits
 Fringe benefits include :
1. Public or legally mandated ( social security,
unemployment compensation , worker’s
compensation,etc)
2. Private or non mandatory-( private pension, medical
and dental insurance , sick leave, paid vocations,
etc)
 Composition of total compensation varies greatly by
industry .
 Fringe benefits proportion of employees is larger in
1. High paying industries
2. Good producing industries than service industries
3. Transportation and public utilities than retail trade
2. Theory of Optimal
Fringe Benefits
 Worker Indifference Map

• The indifference curves show

the combinations of wages and Wages
fringe benefits that yield the
same amount of total utility.
• Fringes benefits are
somewhat substitutable for
wages even though most fringe
benefits are in-kind benefits
(benefits for a specific good or I3
service). I2
• Workers substitute wages for I1
fringe benefits because wages
are taxed, but fringe benefits
are not.
• They also may substitute
wages for fringe benefits to
insure money is available for Fringe Benefits
health insurance and
retirement.
 Employer’s Isoprofit Curve

Wages
• An isoprofit curve (WF) shows
the combinations of wages and
fringe benefits that yield the
same amount of profits.
W
• We assume that competition
will yield a normal profit.

• This curve shows the

combinations of wages and
fringes the firm can afford to
provide, given the “prices” of
wages and fringe benefits.
F
Fringe Benefits
 Wage-Fringe Optimum

Wages
• The optimal combination of
wages and fringe benefits is at
B, where the isoprofit curve is
tangent to the highest attainable
indifference curve (I2).
• Here the firm will provide W0
wages and F0 fringe benefits. W
A
• Points A and C are also B
attainable combinations of W0 I3
wages and fringe benefits, but I2
they yield less total utility C I1
since they are on a lower
indifference curve (I1).
F0 F Fringe
Benefits
 Fringe Benefit Growth

• A decrease in the price of

fringe benefits due to tax Wages
advantages, scale economies,
and efficiency considerations
fans the normal isoprofit line W
outward.

• This allows the worker to

attain a higher indifference W0 A
curve (I2 rather than I1). W1
B

• In the process, fringe I2

benefits expand from F0 to F1. I1

F0 F1 F F’ Fringe
Benefits
 Causes of Fringe Benefit Growth

●
Tax advantages to employers
●
Fringe benefits reduce the taxes the
employers pay.
– Employers pay half of the Social Security
tax.
– If employers substitute fringe benefits for
wages, their taxes will be reduced.
●
The Social Security tax rate and base
have increased over time.
– This rotated out the isoprofit curve and
increased fringe benefits.
 Causes of Fringe Benefit Growth

●
Economies of scale
●
There are significant scale
economies in the provision of
fringe benefits.
●
Firms have grown in size over
time and lowered the per unit
cost of fringe benefits.
– This rotated out the isoprofit curve
and increased fringe benefits.
 Causes of Fringe Benefit Growth

●
Efficiency considerations
●
Employers prefer to have lower
turnover to protect their training
investments and reduce recruiting
costs.
– Fringe benefits such as pensions reduce
worker turnover.
●
Over time, training by firms have
increased and so firms have had
increased incentive to use fringe
benefits to reduce turnover.
 Principal-Agent Problem

●
The principal-agent problem occurs
when agents (workers) pursue some of
their own objectives which are in conflict
with the goals of the principals (firms).
●
Workers can increase their leisure by
shirking (working slowly or taking
unapproved breaks) on the job.
– The profits of the firm will be lowered.
●
Firms have a profit incentive to reduce
principal-agent problems.
 Pay for performance
Piece Rates
o Piece rates are compensation paid in
proportion to the number of units of output.
●
Piece rates limit the amount of shirking.
●
Drawbacks
●
May be difficult to set rate.
●
They increase income variability and so firms
will have to pay a premium.
●
Difficult to use where team production is
employed.
●
Workers may decrease quality.
 Commissions
and Royalties

o Commissions and royalties are

compensation paid in
proportion to the value of
sales.
●
These are efficient where work
effort is difficult to observe.
– Authors, sales people, recording
artists
 Raises and Promotions

Annual Income
• If a worker is paid by the
hour, the worker will choose
point A with an annual income
equal to Y1with L1 hours of I2
leisure. I1
• An equivalent annual salary
of Y1, the worker can get to a
higher indifference curve I2 by W
increasing hours of leisure to L2.
• The worker can get this A B
higher level of utility by Y1
shirking.
• The firm can overcome this
incentive problem by offering
future raises or promotions to 0 L1 L2 L Leisure
those who consume L1 hours or
less of leisure.
 Bonuses

o Bonuses are payments beyond the annual

salary based on some factor such as
personal or firm performance.
●
Elicit extra work effort and are not permanent
costs.
●
Personal performance bonuses
●
Based on evaluation by superiors or
quantifiable measure.
●
May have unintended effects.
– Workers schmooze superiors.
 Bonuses
●
Team performance bonuses
●
Based on team performance.
●
Leads to the free-rider problem.
– Workers have less incentive to work
hard as the size of the group rises
since their own effort matters less.
●
Team performance bonuses work
best when the size of the group is
small.
 Profit Sharing

o Profit sharing is a pay system that

allocates a portion of the firm’s profits to
its employees..
●
Supporters argue that profit sharing gives
workers the incentive to work harder to
increase firm profits.
●
Critics argue that it suffers from the free-
rider problem.
●
Evidence indicates a modest positive effect
on productivity.
 Efficiency Wage Payments

●
Firms may reduce shirking by
monitoring the efforts of workers.
●
Monitoring workers is costly in
some cases.
●
Babysitters, security guards,
managers
●
One solution is to pay an above-
market wage.
 Wage-Productivity Dependency
●
A higher wage may increase worker
productivity by:
●
Increasing employee work effort
●
Improving worker capabilities
●
Increasing the proportion of skilled workers in
the workforce
●
An efficiency wage is one that minimizes an
employer’s wage cost per effective unit of
labor employed.
●
The marginal benefit of a higher wage equals
the marginal cost of the higher wage.
 Efficiency Wage Theories

●
Shirking model
●
Paying an above-market wage will increase
the relative wage of the job.
– This raises the opportunity cost of being terminated
for shirking.
– Workers increase their effort (productivity) in
response to this higher opportunity cost.
●
Labor turnover model
●
Firms increase wage to reduce turnover.
– The lower turnover increases productivity since
more experienced workers don’t quit as often.
 Non-Clearing Markets

• Suppose a firm finds it can

lower its effective cost per unit Wage rate S
of labor by increasing the wage B C
rate from W1 to W2. W2
• The lower cost is the result of
increased productivity of the
workers. This reflected in a
rightward shift in the labor W1 A
demand curve from D1 to D2.
• Though W2 is an equilibrium D2
wage, it results in a labor
surplus of BC and is not the D1
market clearing wage.
• The unemployment of BC
workers generates part of the
productivity gain since the
threat of unemployment Q1 Q2
Quantity of
encourages workers not to Labor Hours
shirk.
 Criticisms
●
Alternatives to efficiency wages exist
such as piece rates and
commissions.
●
Workers could post a bond they
would forfeit if they were found
negligent.
●
Employers could reduce shirking by
deferring part of worker’s pay.
 4.4 The theory of minimum wage
 It is very much desirable that minimum wages
for workers specially for industrial workers be
fixed
 The whole philosophy underling the enactment
of minimum wage is to prevent both deliberate
exploitation of labor through the payment of
unduly low wage
 The following factors will be taken into account,
while determining the fair wage.
 Continued……….
 Capacity of industry to pay
 Productivity of labor
 Prevailing rates of wages in the same or
neighboring localities
 Level of national income and its distribution
 Standard of living.
 
 Objectives of fixing minimum wage
 To prevent sweating in industry or other work, to raise
wages in industries where they are extremely low and
inadequate.
 To prevent exploitation of workers and to secure a
wage according to value of work done. Corresponding to
the productive capacity of workers.
 To promote peace in industry by keeping workers
contended with the guarantee

 To raise standard of living and efficiency of workers .

Advantage of minimum wage fixation
Prevents monopolistic employers from
exploiting low skilled labour
Shocks employers into greater technical
efficiency

Disadvantage of fixation of minimum wage

Increase unemployment particularly among
teenagers ,females, and minorities
 Effects of minimum wage.
o minimum wages are specified in nominal, not real
terms.
o employment reduction under perfect competition
and complete coverage.
 Minimum Wage Effects – Non-covered Sector
 In its early years, the federal minimum wage law
did not apply to a large percentage of workers:
workers in agriculture, for example, were not
covered
 many living wage laws apply only to workers
employed by a city or firms with city contracts.
 In these cases we can speak of covered and
uncovered sectors.
 Continued ……
 after the minimum wage is introduced in the
covered sector, its wage rises.
 This causes unemployment, forcing some workers
in the covered sector to pursue jobs in the
uncovered sector.
 As a consequence, supply shifts from the covered
to uncovered sector,
 this continues until the unemployment eliminated
Cont..............
 Monopsony without minimum wage
The monopsonistic employ Em labor at wage rate W’,
but he/she will pay only Wo.
MW
Wage/ C
Suppl
MWC
y
W’
wc

Wo MRPL

employme
Em EC
 Effect of mandated wage on
monopsony
o what would happen if some nonmarket force were to
compel the firm to pay a particular wage rate that
was higher than the one it was paying.
o Would the firm’s desired level of employment
decline?
o The monopsonistic firm for short run response
initially equates MRPL and MWCL at point A and
chooses to hire E0 workers, which requires it to pay a
wage of W0 as indicated in the following figure
 Effect of minimum wage in
monopsony market
Wage/MWC M
Marginal Wage Cost
E S
Supply of labor
W’ A
Wm B C D

W0
MRPL = marginal revenue product

E0 Em E1 employment
 Cont. …
o Suppose now that a mandated wage of Wm is set. This mandate
prevents the firm from paying a wage less than Wm and
effectively creates a horizontal portion (BD) in the labor supply
curve facing the firm (which is now BDS).

o The firm’s marginal expense of labor curve is now BDEM,

because up to employment level E1, the marginal expense of
labor is equal to Wm.

o The firm, which maximizes profits by equating marginal revenue

with marginal expense (this equality is now at point C), will hire
Em workers. Even though wages have risen from W0 to Wm,
desired employment rises from E0 to Em!
 Cont. …
o A mandated wage can simultaneously increase the average
cost of labor and reduce MWCL.

o . It is the decrease in marginal expense that induces the

firm to expand output and employment in the short run.

o Thus, because an upward-sloping supply curve is converted

to one that is horizontal, at least for employment near
the current level, it is possible that both wages and
employment can increase with the imposition of a
mandated wage on a monopsonistic firm.

o This possibility is subject to two qualifications, however.

 Cont. …
o First, employment will increase only if the mandated wage is set

between W0 and W’m . A mandated wage above W’m would increase

MWCL above its current level (W’m ) and cause the profit-maximizing

level of employment to fall below E0

o Second, in the long run, two (opposing) effects on employment are

possible. If mandated wage is not too high, a firm’s MWCL is reduced,

causing a substitution of labor for capital in the long run. While the

firm’s MWCL have fallen, however, labor’s average cost has increased.

It is now more expensive to produce the same level of output than

before; thus, profits will decline. If this latter (scale) effect is large

enough, employment in monopsony firm could fall in the long run if a

 Conclusion
●
The presence of monopsonistic conditions in the
labor market introduces uncertainty into how
employment will respond to the imposition of a
mandated wage if the new wage reduces the
firm’s marginal expense of labor.

o Any shift in the supply of labor curve that

increases the marginal expense of labor will

unambiguously reduce employment.