Answer to Question #110874 in Macroeconomics for hamzah

Question

With the aid of a diagram and with labour hours as my quantity variable , how would a minimum wage rate BELOW equilibrium wage rate affect welfare(1), and what is the effect on welfare if the new minimum wage rate is ABOVE equilibrium wage rate (2)

Answer 1

If the minimum wage is set above the equilibrium wage rate, the quantity of labor supplied by workers exceeds the

quantity demanded by employers. There is a surplus of labor.

Because employers cannot be forced to hire a greater quantity than they wish, the quantity of labor hired at the

minimum wage is less than thequantity that would be hired in an unregulated labor market.Because the legal wage rate cannot eliminate the surplus,

the minimum wage creates unemployment

If the minimum wage is set below the equilibrium wage rate, it has no effect. The market works as if there were no

minimum wage.If the minimum wage is set above the equilibrium wage

rate, it has powerful effects.