Answer to Question #110791 in Microeconomics for LORETTA NICOLETTE CONSTANT

Question

According to the department of labour's new rates, domestic workers working in bigger metropolitan areas who work more than 27 ordinary hours per week, must be paid a minimum of R13, 69 per hour. Workers who work fewer than 27hours per week, must be paid a minimum of R16,03 per hour. This will mean that a domestic worker who works 45 hours per week will now earn a minimum of R2669, 24 a month. With the aid of a diagram, discuss the welfare effect of this new legislation if the minimum wage is below the equilibrium wage and above the equilibrium wage rate with labour hours as your quantity variable.

Answer 1

When the government imposes a minimum wage, firms are not permitted to pay less than the amount that the government mandate

we see that the workers who supply labor would like to sell more hours of labor to the market at the set minimum wage—that is when the wage increases from R1369 to R1613 But firms wish to purchase only fewer hours of labor—firms want to hire fewer labour hours. In a market with voluntary trade, no one can force firms to hire workers. This is represented by the surplus in the graph

If we set a minimum wage that is binding above the market equilibrium wage, we could create a gap between the quantity of labor that firms will demand labor demanded and the quantity of labor that workers will want to supply. This surplus is known as unemployment. At the high minimum wage, we would have more workers wanting to work than we would have firms wanting to employ them.