ECON 2H03 Lecture Notes - Lecture 8: Moral Hazard, Adverse Selection, Structural Unemployment
9 Oct 2016
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The failure of wages to adjust to a level which labour supply = labour demand. Leads to job rationing, if above equilibrium level, there aren"t enough jobs to go around, so amount of unemployment is higher. When unemployment comes when firms do not reduce wages despite excess of labour. Minimum wage laws unskilled workers have low marginal productivity, so min wage may exceed their wage. Compensation for unskilled workers is training, experience etc. The min wage is more binding for younger people in labour force. Can cause some unemployment for some workers, but it can raise others out of poverty. Some argue that min wage earners are young people from middle income families for pocket money rather than heads of families who are in need. To help poorer families, the government has placed income tax credit to subtract from their taxes - this does not raise labour costs to firms and therefore does not affect the demand for labour.
