Answer to Question #111571 in Microeconomics for Busisiwe

Question

Please explain how you go about in answering - this question With the aid of a diagram, discuss the welfare effect of this new legislation if the new minimum wage is (1) below the equilibrium wage and (2) above the equilibrium wage rate with labour hours as your quantity variable

Answer 1

If the new legislation imposes a minimum wage that is above the equlibrium, it creates a gap between the quantity demanded and the quantity supplied.This is becausefirms 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 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.