Answer to Question #111865 in Microeconomics for Nqobile Mbongwa

Question

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.
Gardeners, drivers or people who look after children, the aged, sick, frail or disabled in a private
household, all qualify as domestic workers.
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 labor
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.