Answer to Question #109761 in Microeconomics for Angelina

Question

DOMESTIC workers will no longer be subjected to meagre salaries as the government has
adjusted the minimum wage for domestic workers, with effect from December last year.
The announcement was made by the Department of Labour Minister Mildred Oliphant and it
coincided with the signing into law of the National Minimum Wage Bill by President Cyril
Ramaphosa.
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.

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 wages are lower than equilibrium, then the demand for labor is much higher than supply, since for low wages few workers will agree to perform the specified amount of work.

2)

If wages are higher than equilibrium, then the demand for labor is much less than supply, because with high wages, only a few entrepreneurs will be able to pay for this labor.