Define the following terms and explain their importance to the study of economics

Question

a. minimum wage law
b. income and substitution effects
c. backward-bending labor supply curve
d. human capital theory
e. dual labor markets

Answer 1

a. The minimum wage law places a lower floor on the wage that an employer can pay. It is most likely to have an impact on low-income, low-skilled workers, who are new in the work force. Like any other price floor, the minimum wage is thought by economists to lead to unemployment among young, unskilled persons.
b. At higher wage rates consumers are able to consume more, including the consumption of leisure time. This income effect probably leads most workers to want to work less. The wage rate is the "price" of leisure. As wages increase, the substitution of leisure for wages forgone becomes a more expensive option. The two effects have opposite impacts on the supply of labor.
c. A backward-bending labor supply curve is likely to occur among highly paid persons. The income effect from a pay increase has the effect of increasing the demand for leisure. The substitution effect from a pay increase has the effect of increasing the desire for work and income. If the income effect is greater in magnitude than the substitution effect, then the labor supply curve will become backward bending.
d. Human capital theory is an attempt to explain wage differentials. In this view, education spending is a form of capital spending; it increases the earning potential of a person, and the payoff occurs over a future period of time. Proponents of this view think that schooling takes less productive workers and transforms them into more productive workers. Critics of this view include those who view education as a sorting mechanism; radical critics of schooling who view education as teaching docility and conformity; and dual labor market proponents who see two different types of jobs and career paths.
e. The dual labor market theory encompasses two types of labor markets: the primary and the secondary labor markets. The primary labor market is where most of the economy's "good jobs" are-with attractive pay, fringe benefits, and career advancement possibilities. In the primary labor market, the human capital theory view seems valid. In the secondary labor market, there are the "bad jobs" with low pay, few or no fringes, and virtually no training to improve workers' skills. In this market, the human capital theory seems invalid.