Answer to Question #268148 in Macroeconomics for Ntha

Question

South Africa has an unemployment rate of around 32.6% (using the narrow definition) and 43.2% (using the broad definition). Using market supply and market demand curves describe how the market will react to the introduction of statutory minimum wage. Indicate what the likely effect would be on the unemployment situation in South Africa.

Answer 1

In a demand and supply model, equilibrium, or market equilibrium, is reached when demand equals supply, implying that there is market clearing.

A minimum wage now serves as a price floor, and it is effective when it is set higher than the equilibrium price level. At a higher price level in the labor market, where wages are high, demand for labor falls but supply rises, as more and more workers are eager to work for better pay, while businesses want to minimize costs. As a result, there is an excess supply of labor in the labor market, which leads to higher unemployment.