When the minimum wage increases from \$12 to \$18, what does economic theory typically predict about employment in a competitive labor market?

• A. There will be no effect on employment levels.
• B. Employment will always increase as wages rise.
• C. All workers will keep their jobs and receive higher wages.
• D. Some workers may lose their jobs due to higher labor costs.

Answer: (D)

Verified step by step guidance

1. Understand the basic model of a competitive labor market, where the wage rate is determined by the intersection of labor supply and labor demand curves.
2. Recognize that an increase in the minimum wage from \$12 to \$18 sets a wage floor above the equilibrium wage, causing the wage to be artificially higher than the market-clearing level.
3. Analyze the effect of this higher wage on labor demand: firms face higher labor costs, so they tend to reduce the quantity of labor demanded, leading to potential job losses.
4. Consider the effect on labor supply: higher wages may encourage more workers to offer their labor, increasing the quantity of labor supplied.
5. Combine these effects to conclude that while some workers benefit from higher wages, others may lose their jobs because firms hire fewer workers at the higher wage, which aligns with the prediction that some workers may lose their jobs due to higher labor costs.