Answer to Question #111341 in Microeconomics for Regina

Question

Discuss the the welfare effect of the new legislation if the new minimum wage is for domestic workers is above the equilibrium

Answer 1

When the minimum wages are currently at the market rate, workers are obligated to agree with the prices when taking the job. For example, if 50 workers are available and willing to work, they have no choice but to accept $5 per hour, for that is what firms are ready to pay. 

However, this market is bound to change if the government comes in and increases the minimum wage from $5 to $7 per hour. When this happens, the market will lose the job market. Therefore, it will create a gap between the quantity of labor demanded by companies and the amount of labor supplied by workers because, at $7 per hour, firms would instead decrease the hiring rate. This surplus of workers in the market due to increased minimum wage is known as unemployment. Therefore, an increase in the minimum wage will lead to an increase in unemployment.