Answer to Question #111027 in Microeconomics for Thato

Question

Area A(Bigger Metropolitan Areas) workers working more than 27 hours per week earn R13,69 per hour and Area B workers working less than 27 hours per week earn R16.03 per hour.

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)Suppose that the government decided to set the minimum wage below equilibrium, then we get the following diagram:

Such wages will not meet the expectations of some workers, they will not agree to perform this work for a given wage.

2) However, the government can decide to establish a minimum wage higher than the equilibrium, then we get the following diagram:

Now, on the part of employers, job cuts are possible, as their financial expectations correspond approximately to the level of equilibrium wages. This decision of the government will lead to the fact that part of the workers in this sector will become unemployed.