Answer to Question #111076 in Microeconomics for Sakhile Sibiya

Question

Domestic workers will no longer be subjected to meagre salaries as the government has adjusted the minimum wage for domestic workers, with effect from December last year.

According to the Department of Labour's new rates, domestic workers working in Area A (bigger metropolitan areas) who work more than 27 ordinary hours per week, must be paid a minimum of R13.60per hour.
Workers who work fewer than 27 hours per week, must be paid a minimum of R16.03 per hour.
This will mean that domestic worker who works 45 hours per week will now earn a minimum of R2669.24 a month.
Gardeners, drivers or people who look after children, the aged, sick, frail or disabled in a private household, all qualify as domestic workers,

With the aid of a diagram, discuss the welfare effect of this new legislation if the new minimum wage is (1) below equilibrium wage and (2) above the equilibrium wage rate with labour hours as your quantity variable.

Answer 1

The introduction of a minimum wage is an intervention in the market mechanism. This intervention can be considered in two ways: when the government sets it below or above the equilibrium value of wages in the market.

1) If wages below the equilibrium level are established, then it can be argued that this will entail a decrease in labor market supply, as part of the labor force will tend to obtain professions in which labor is paid higher.

2) If wages are above the level of equilibrium, then it can be argued that this will entail an increase in the supply of labor, as part of the labor force.

This situation will also affect the demand for labor, reducing it, as employers can reduce jobs in such a situation.