Homework SourseHello Could you please help me with the below question In th
Hello,
Could you please help me with the below question?
In the early 1990s a teen subminimum training wage law was passed by which employers were allowed to pay teenagers less than the minimum wage.
a. What effect would you predict this law would have, based on standard economic theory?
3) More teens would be employed because they are much more productive than non-teens. This would decrease costs for firms, causing more employees to be hired.
b. In analyzing the effects of the law, Professors Card and Kreuger of Princeton University found that few businesses used it and that it had little effect. Why might that have been the case?
| 1) | The minimum wage for all employees would fall because the invisible hand would result in a new market equilibrium wage that is lower than before. |
| 2) | Fewer teens would be employed because, even with the lower wage rate, it is difficult to train young workers. |
| 3) More teens would be employed because they are much more productive than non-teens. This would decrease costs for firms, causing more employees to be hired. | |
| 4) More teens would be employed because their relative wage is lower compared to non-teens, but they would then lose their jobs after the training period is over. |
Solution
a. (4) More teens would be employed because their relative wage is lower compared to non-teens, but they would then lose their jobs after the training period is over.
The standard economic theory predicts that whenever wage is low, demand for labour would be high and the supply of labour will be less. As a result of the introduction of teen subminimum training wage law, by which employers are allowed to pay teenagers less than the minimum wage, the wage rate would be around the market clearing wage. The minimum wage is set above the market clearing wage. Now when the wage for teens is less compared to non-teens, more teens would be employed (as their relative wage is lower) and when their training period will be over and they will turn into non-teens, then they will be losing jobs.
b. (3) It is likely that the administrative costs of participating in the program were higher than the benefits of hiring teens at the lower training wage. Also, social forces would have kept many firms from firing older workers to replace them with cheaper teen labor.
The labour costs are not a significant part of a firm’s total cost, thus the law had a little effect on employment. Also, there is an added social force that drives the employer not to replace the existing employees for the new just because the relative wge for new teens would be lower.
