Q. For an increase in the effective minimum wage to have less of an impact on employment, which of the following is correct?
(a) The demand for labour is relatively inelastic
(b) The demand for labour is relatively elastic
(c) The demand for labour is a derived demand
Choose the correct answer from the code given below:
(1) (a) only (2) (c) only (3) (a) and (b) (4) (a) and (c)
ANS: (4) The lowest possible remuneration an employer offer to his employees can be termed as
minimum wages. In other words it is a kind of price floor below which workers are unwilling to offer
their labour. The effectiveness of minimum wages on employment is highly related to the nature of
elasticity of labour demand. The degree of elasticity of demand for labour indicates how much
responsive is the demand requirements of a firm to a change in the wage rate. If the demand curve
for labour is more elastic, it means a change in wage rate has more than proportionate impact on
the demand decision of a firm. As the demand for labour and wage rate is inversely related, a
reduction in wage rate could increase the demand for labour more than proportionately. On the
other hand, if the demand for labour is less elastic or relatively inelastic, a change in the minimum
wages will have only small effect on demand for labour. So for an increase in minimum wages to
have less impact on the employment, the demand for labour should be relatively inelastic.
The demand for factors are said to be derived demand, i.e. the demand for factors are dependent
on the demand for the products which the particular factor is used in the production process. When
the demand for products increases, the demand for factors which used for production also increases
and vice versa. During the times of economic prosperity production level increases thus demand for
factors of production also increases. As the economy moves into recession, demand for factors
reduces. Thus an increase in the minimum wages to have higher impact on the employment, there
should be higher derived demand for labour.