Answer to Question #109374 in Macroeconomics for Dineo Ngcobo

Question

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 R13,69 per hour.
Workers who work fewer than 27 hours 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 R2 669,24 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 the equilibrium wage and (2) above the equilibrium wage rate with labour hours as your quantity variable.

Answer 1

(1) If the new minimum wage is below the equilibrium wage, then there will be no change in the labour market, because it is non-binding price floor.

(2) If the new minimum wage is above the equilibrium wage rate, then the surplus of labour will occur.