Why unemployment quantity can be larger than the market employment based on this price ceiling supply/demand chart?

Also, Isn't that (quantity demanded at minimum wage + unemployment = market employment)? enter image description here


1 Answer 1


First of all, think about the definition of unemployment as it is used in this example. An unemployed person is someone that wants to work, but who cannot, because he can't find a job - as labor supply is not high enough. The crucial point is that people may want to work in some situations, but in others they may not.

With this in mind, the reason that the equation you postulate is incorrect, is due to the fact that the labor supply in your example is elastic. That means, the higher the wage, the higher is the labor supply. You can see this in the upward shape of the labor supply function. To answer your question: The unemployment quantity under minimum wage becomes larger than the market employment, because after the wage increases more people want to work, and hence the quantity of

employed people + unemployed people

increases - as compared to the market equilibrium before where the wage was lower.

It is also interesting to think about a case in which your initial thought would be correct. This would be the case if labor supply was completely inelastic. This situation is reached as the labor supply curve rotates to the left (staying in the initial market equilibrium) until the labor supply curve is a vertical line. In this situation your equation

quantity demanded at minimum wage + unemployment = market employment

holds. This is how it would look like:

enter image description here


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