In the graph you’ve just explored, what happens when the real wage rate is $30 an hour? A. A labor shortage forces the real wage rate down. B. A labor shortage forces the real wage rate up. C. The labor market is in equilibrium. D. A labor surplus forces the real wage rate down.
The correct answer and explanation is:
The correct answer is D. A labor surplus forces the real wage rate down.
Explanation:
In the context of labor markets, when the real wage rate is set at $30 an hour, it represents a point in the supply and demand interaction for labor. The real wage rate is determined by the equilibrium between the demand for labor (from employers) and the supply of labor (from workers).
If the wage rate is set too high, such as $30 an hour, it can create a labor surplus. This occurs because the higher wage rate typically encourages more individuals to offer their labor (supply increases), as more people are willing to work at higher wages. However, employers may not be willing to hire as many workers at the higher wage rate, reducing the demand for labor. As a result, there are more workers looking for jobs than there are job opportunities at the $30 wage rate.
This mismatch creates an excess supply of labor, known as a labor surplus. When there is a surplus of labor, employers do not need to offer the high wage to attract workers, so they might lower the wage rate to reduce the surplus and bring the labor market back to equilibrium. This dynamic forces the wage rate to decrease.
In contrast, if the wage were lower, say closer to the equilibrium wage rate, the labor market would tend toward equilibrium, where the quantity of labor demanded by employers equals the quantity of labor supplied by workers. At that point, there would be no surplus or shortage of labor.
To summarize, when the wage rate is set too high, such as $30 an hour, the result is a labor surplus, and the excess labor will exert downward pressure on the wage rate until it reaches a level that balances supply and demand.