Answer to Question #109740 in Macroeconomics for Sibonelo Nxele

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

New legislation will have an effect on surpluses.

As we can see on a diagram, when minimum wage is established above the equilibrium, the supply exceedes demand and less warkers will be employed(Ld<L'). And the economy losses (c+e) while other parts of surpluses is redistributed(workers = (d+b), employers = (a)).

There is complately opposite situation when minimum wage established below equilibrium. The demand exceedes the sypply, and again less workers will be employed(Ls<L'). The economy loses (d+e) of surpluses and the other parts of it are allocated diferently as well(workers = c, employers = (a+b)).

So in both cases in short-run we can see worsening of the situation.