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 Suppose the number of employed people in Pakistan is 20

Economics Nov 25, 2020

 Suppose the number of employed people in Pakistan is 20.5 million. The unemployment rate in this economy is 8.8 percent, and the labor force participation rate is 65 percent. (1.5 Marks)
i. What is the size of the labor force and working-age population?
ii. How many people are unemployed?

b. Explain and analyze different government policies which affect the unemployment rate in Pakistan? (1.5 Marks, Maximum 200 words).

c. Before June 2020, the labor market in Pakistan was at equilibrium with an equilibrium wage (WE) of Rs. 15,000 and equilibrium quantity of labor (LE) 10 million. In the last week of June, 2020, government of Pakistan imposed a minimum wage Act raising the minimum wage to Rs. 20,000. Using a graph, explain the effect of imposition of minimum wage on unemployment in labor market of Pakistan (2 Marks).

Expert Solution

a) The number of employed are 20.5 million.

Also we are given the unemployment rate as 8.8%.

This means that employment rate is 100-8.8% =91.2%

From this the total labor force could be determined which is

Total labor force= 20.5*100/91.2

= $22.47 million

So labor force participation is $22.47 million

Now the labor force is 65% of total adult population, so

Total adult population= 22.47*100/65

= $34.58 million

b) Number of unemployed= 8.8% of 22.47milllion

=1.97 million

c) Government could use fiscal policies to influence unemployment rate. If the unemployment rate is too high, the government can reduce taxes and increase government spending. This would lead to higher aggregate demand and more production which would lead to lower unemployment. This could also lead to a higher inflation rate but as long as the inflation is within a certain range, the unemployment could be focussed upon.

d) Government could impose a binding minimum wage which would lead to surplus of labor because it would be higher than market wage and hence more workers would want to work.

This could be shown with the graph below

minimum wage is given as Mw. Since it is higher than market wage, there is more supply but less firms are demanding the workers. Hence there would be unemployment at this level . There are people who are better off ie who got the job at minimum wage but the rest remained unemployed.

please see the attached file for the complete solution.

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