Worth: Mankiw Economics 5e 162 PART 11 Classical Theory: The Economy in the Long Run fiqure 6-3 Real wage Real-Wage Rigidity Leads to Job Supply Rationing If the real wage is level, then the supply of labor Amount of exceeds the demand. the result is unemployment. Amor Demand labor hired Labor Amount of labor To understand wage rigidity and structural unemployment, we must examine why the labor market does not clear. When the real wage exceeds the equilib- rium level and the supply of workers exceeds the demand, we might expect firms to lower the wages they pay. Structural unemployment arises because firms fail to reduce wages despite an excess supply of labor. We now turn to three causes of this wage rigidity: minimum-wage laws, the monopoly power of unions,and efficiency w Minimum-Wage Laws The government causes wage rigidity when it prevents wages from falling to equilibrium levels. Minimum-wage laws set a legal minimum on the wages that firms pay their employees. Since the passage of the Fair Labor Standards Act of 1938, the U.S. federal government has enforced a minimum wage that usually has been between 30 and 50 percent of the average wage in manufacturing. For most workers, this minimum wage is not binding, because they earn well above the minimum. Yet for some workers, especially the unskilled and inexperienced, the minimum wage raises their wage above its equilibrium level. It therefore reduces the quantity of their labor that firms demand. Economists believe that the minimum wage has its greatest impact on teenage unemployment. The equilibrium wages of teenagers tend to be low for two reasons. First, because teenagers are among the least skilled and least experienced members of the labor force, they tend to have low marginal pro- ductivity. Second, teenagers often take some of their"compensation"in the User JOENA: Job EFF01422: 6264_ch06: Pg 162: 26233 #/eps at 100s wed,Feb13,20029:364MUser JOEWA:Job EFF01422:6264_ch06:Pg 162:26233#/eps at 100% *26233* Wed, Feb 13, 2002 9:36 AM To understand wage rigidity and structural unemployment, we must examine why the labor market does not clear.When the real wage exceeds the equilib￾rium level and the supply of workers exceeds the demand, we might expect firms to lower the wages they pay. Structural unemployment arises because firms fail to reduce wages despite an excess supply of labor. We now turn to three causes of this wage rigidity: minimum-wage laws, the monopoly power of unions, and efficiency wages. Minimum-Wage Laws The government causes wage rigidity when it prevents wages from falling to equilibrium levels. Minimum-wage laws set a legal minimum on the wages that firms pay their employees. Since the passage of the Fair Labor Standards Act of 1938, the U.S. federal government has enforced a minimum wage that usually has been between 30 and 50 percent of the average wage in manufacturing. For most workers, this minimum wage is not binding, because they earn well above the minimum.Yet for some workers, especially the unskilled and inexperienced, the minimum wage raises their wage above its equilibrium level. It therefore reduces the quantity of their labor that firms demand. Economists believe that the minimum wage has its greatest impact on teenage unemployment. The equilibrium wages of teenagers tend to be low for two reasons. First, because teenagers are among the least skilled and least experienced members of the labor force, they tend to have low marginal pro￾ductivity. Second, teenagers often take some of their “compensation’’ in the 162 | PART II Classical Theory: The Economy in the Long Run figure 6-3 Real wage Labor Supply Demand Amount of unemployment Amount of labor hired Amount of labor willing to work Rigid real wage Real-Wage Rigidity Leads to Job Rationing If the real wage is stuck above the equilibrium level, then the supply of labor exceeds the demand. The result is unemployment