Answer to Question #123333 in Microeconomics for Shamema Syed

Question

Discuss the welfare effect of setting a minimum wage of R13/hr above or below equilibrium wage for 20 marks.

Answer 1

In the labor market, the government may intervene the market by setting a minimum wage rate (price floors and price ceilings).

If the government sets the minimum wage rate above the equilibrium wage rate, this means that the quantity of labor supplied will be greater than the quantity of labor that the employers are willing to employ. This will create a surplus of labor in the market, meaning that unemployment will be created.

Usually, when the minimum wage rate is set below the equilibrium wage rate, there is no effect in the labor market. The equilibrium quantity of labor demanded and supplied will not be affected and so the price floor will not be binding.