Answer to Question #111654 in Microeconomics for Mo

Question

According to the Dept of Labour’s new rates, domestic workers working in Area A who work more than 27 ordinary hrs p/w, must be paid a minimum of R13,69 p/h.
Workers who work fewer than 27 hrs p/w, must be paid a minimum of R16,03 p/h.
This will mean that a domestic worker who works 45 hrs p/w will now earn a minimum of R2 669,24 a m.
Gardeners, drivers or people who look after children, the aged, sick, frail or disabled in a private household, all qualify as domestic workers.
Q:
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

When the government legislation imposes a minimum wage that is above equlibrium, the quantity of labour demanded reduces as because labour becomes more expensive to firms.The quantity supplied is therefore more than the quantity demanded which creates a surplus knon as real wage unemployment.