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Determinations of minimum wages in a perfectly competitive market.

When the government decides that the equilibrium wage in a labor market is too low it often sets a "minimum wage" or "wage floor," mandating that the market wage can be no lower than the minimum wage. Many cirtics of this policy contend that it is ineffective and conunterproductive for two reasons:

(1) it creates unemployment among the low-wage, mostly poor workers it was supposedly designed to help, and
(2) it lowers the total earnings (WXL) received by the low-wage workers who are still emplyed.

Assuming that the labor market for low-wage workers is perfectly competitive and all low-wage industries are covered by minimum wage laws, briefly discuss and illustrate the circumstances under which the minimum wage laws, briefly discuss and illustrate the circumstances under which the minimum wage would
(1) not lead to unemployment, and
(2)not cause a reduction in the total earnings of low-wage workers who are still employed.
NOTE: The demand for labor in a perfectly competitive industry is determined by the "value of the marginal product of labor," or VMP, where VMP = PXMP_L, with P = the price of the product the labor is used to produce, and MP_L = the marginal product of labor used. Moreover, recent labor market research has revealed that in most cases the demand for low-eage labor is relatively inelastic.

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